Mind the U-Turn: See it, say it, but don't do it…

Reeves’ Budget Reset

The UK government’s autumn budget, scheduled for 26 November, is now being positioned differently after Chancellor Rachel Reeves reportedly abandoned earlier plans to raise headline income-tax rates. Reeves faces a delicate balancing act. Ensuring fiscal stability to plug a gap estimated at up to £30 billion, while staying true to manifesto promises and avoiding moves that could stifle growth. Every decision is scrutinised meticulously, leaving the Chancellor often treading on eggshells when setting policy.

Rumours recently emerged that Reeves would increase income tax by 2p and reduce employee National Insurance (NI) by the same amount, a shift projected to raise up to £6 billion. Treasury officials are reportedly still considering dozens of policy options – far more than in previous budgets – highlighting the fluidity and political sensitivity of decisions at this late stage.

What might fill the gap?

With headline income-tax hikes largely off the table, attention has shifted to the second tier of potential revenue-raisers. One proposal circulating in policy circles is a UK exit tax, levied on individuals who change tax residence to avoid future liabilities. Similar schemes exist in the US, Canada, and Germany, typically aimed at capturing unrealised gains before departure.

For the UK, an exit tax would be framed as a fairness levy targeting high-net-worth individuals relocating to low-tax jurisdictions. While politically attractive, the practical yield is likely modest and carries the risk of signalling a less open stance toward international wealth – a delicate message for a country seeking investment.

Other potential measures include:

• Reforming pension tax relief, particularly for higher earners
• Tweaks to inheritance tax planning tools
• Aligning capital gains taxation more closely with income-tax rates
• Adjustments to the non-domicile regime
• Raising duties on tobacco, alcohol, gambling, or digital services
• Extending fiscal drag measures via threshold freezes

Collectively, these approaches could help close the fiscal gap without breaching manifesto commitments.

Choppy Markets

October was strong for gilts as markets priced in expectations of potential rate cuts, following better-than-expected macroeconomic data. However, news of the U-turn and the prospect of last-minute budget decisions has unsettled investors over the past week.

The pound has dipped, and gilt yields have risen as markets digest the implications of weaker clarity around fiscal tightening. Markets react not only to policy changes themselves but also to uncertainty around signals – and the reversal of plans has reintroduced unease.

The FTSE has also fallen amid concerns that the “black hole” in public finances still needs plugging, potentially at the expense of businesses. Companies value certainty, as it enables better planning for investment, borrowing, and hiring. Conversely, calm gilt markets help maintain borrowing costs, sterling stability reduces imported inflationary pressures, and less fiscal unpredictability enhances margin visibility.

While an income-tax rise would have been mildly deflationary — explaining some initial market optimism – alternative measures such as VAT hikes could drive inflation higher. The U-turn has thus been reflected in lower equities, higher yields, and a weaker pound, reinforcing the idea that markets care more about clarity than the actual policy.

Looking Ahead

While the budget will still be politically significant – balancing manifesto commitments, internal party tensions and fiscal credibility – it is unlikely to reshape the broader investment or economic picture. For the immediate horizon:

• Headline tax rates may stay stable, but more revenue will likely be raised via fiscal drag (threshold freezes) and incremental tweaks.
• Businesses and investors should anticipate modest headwinds from higher tax burdens, but no large shock to profit-margins or trade conditions.
• Markets will continue to be driven more by corporate earnings growth, central bank policy (e.g. the Bank of England), inflation trajectories and the global economic backdrop, rather than the structural tax regime in this budget.

The expected tax-framework may have shifted slightly with the U-turn meaning less overt pain for taxpayers now, but a similar fiscal-tightening path remains to manage the Chancellors fiscal headroom.

While the picture remains unclear, the Office for Budget Responsibility (OBR) forecasts have improved, broadly bolstering the outlook for the UK. This is more incremental for the wider economy than small tax tweaks, with growth expectations a large driver behind Reeve’s expected fiscal decisions. If the OBR signals that the UK is stuck in a low-growth environment, it forces Reeves into a cycle of continual tightening. If it signals improving productivity, the Chancellor gains fiscal headroom without touching tax rates at all.

Noise:

• The week opened strongly after the US Senate advanced plans to end the longest-ever government shutdown, lifting market sentiment. Investors welcomed the breakthrough, as reopening the government would restore access to key economic data—crucial for assessing the health of the US jobs market and, more broadly, the economy ahead of next month’s Fed interest rate decision.
• However, the early momentum faded, with equity markets giving back much of their weekly gains on Thursday after Federal Reserve officials signalled caution on future rate cuts. Policymakers cited persistent inflation concerns and signs of relative stability in the labour market after two cuts earlier this year. Options markets had implied a 60% chance of a December rate cut earlier in the week, but pricing now suggests only a 49% likelihood of a 25-basis-point move. AI-related and technology stocks were the hardest hit as investors took profits following a strong run.
• In a notable shift from his earlier approach, President Trump is preparing substantial tariff reductions to help address high food prices. The move follows Democratic victories last week in key states, where voters highlighted concerns over the rising cost of goods. The administration is now seeking trade deals with several Latin American countries to lower prices on everyday grocery items, such as beef, bananas, and coffee beans in an effort to ease grocery bills that have frustrated Americans for years.