Britain’s Reeves addresses speculation over tax hikes in speech before Budget

British Prime Minister Rachel Reeves on Tuesday gave a clearer signal that tax increases will be delivered in the autumn budget later this month, in a surprise speech from Downing Street this morning.

Mr Reeves addressed speculation surrounding his financial plans, telling Britons that his budget will focus on “fairness and opportunity” but that there are “pressures on public finances” that need to be faced.

“There’s a lot of speculation about what choices I’ll make, and I understand that,” she said.

“These are important choices that will shape the future of our country for years to come. I want people to understand the situation we face, the principles that guide my choices, and why I believe they are the right choices for this country,” she said.

Mr Reeves said the UK had “considerable economic power” but “years of economic mismanagement” by the previous Conservative government had limited Britain’s progress and potential.

He said protecting the NHS, reducing the national debt and tackling the cost of living crisis were priorities and that he was ready to make “the choices necessary to deliver the strong foundations of our economy”.

“The choices I will make in this Budget this month will focus on creating the conditions for interest rate cuts to reduce inflation, support economic growth and improve the cost of living.”

Her speech was branded an “emergency press conference” by government critics as there was little sign of it happening until last night, but it was widely seen as an attempt to break the ground and manage expectations for the tax hike.

The chancellor faces difficult choices despite pledging to stick to strict “fiscal rules” of funding day-to-day government spending with tax revenue rather than debt and ensuring that public debt as a share of economic output is reduced by 2029-30.

Mr. Reeves has repeatedly emphasized his commitment to fiscal rules, and on Tuesday he similarly called them “ironclad.” The yield on Britain’s benchmark 10-year government bond (also known as gilt) fell by almost 4 basis points to 4.405% during the speech, suggesting investors were reassured that Mr. Reeves would maintain his position.

Mr Reeves is due to table his autumn budget on November 26, and it is widely expected to include tax increases, despite Labor’s pledge not to raise income tax, value added tax or national insurance contributions in a bid to win the 2024 general election.

The Chancellor is in a predicament, given that his last Budget included around £40bn worth of tax increases, with most of the burden falling on businesses and employers. Reeves said the tax enforcement is a one-time thing. On Tuesday, the chancellor did not provide details about the tax increase when journalists asked where the ax might fall.

But she has hinted in recent months, along with Chancellor Keir Starmer, that tax rises could be coming. “We need to be honest with people about the challenges we face,” she told CNBC last month, adding, “We will respond within budget.”

Mujtaba Rahman, managing director for Europe at Eurasia Group, said in a memo late Monday night that Reeves faces a tough choice between prioritizing politics or the economy when putting together a budget.

“Economics is increasingly pointing to what Whitehall insiders are calling a ‘go big’ strategy: another big tax increase, including income tax, to close the gap of about £30bn to meet Mr Reeves’ goal of balancing government spending and revenue by 2029-2030,” Rahman said.

He said financial markets would welcome significant fiscal consolidation, but that small tax increases would not be enough.

But Labor is very wary of abandoning its election manifesto promise not to raise income tax, and such a move would leave it heavily exposed to attacks from opponents such as the Conservative Party and the increasingly popular Reform Party.

“While no decision has been taken yet, the Eurasia Group believes that, taken together, there is a slim chance that the chancellor will decide to go ‘big’ and breach his manifesto commitments on income tax,” Rahman said.

Financial markets are seen as the target audience for Reeves’ speech, which is scheduled to take place around the opening time of 8 a.m. London time.

“Tax increases are the topic of all conversations as we head into the fall budget, and the tax increases are clearly a strategy to prepare the political and market ground for what is expected later this month,” Teneo managing director Kirsten Nickel told CNBC.