Key events
Goldman Sachs also expect tax rises
Analysts at Goldman Sachs have predicted that Rachel Reeves’s budget could push down government borrowing costs, if she reassures the bond markets that she’s committed to tackling the deficit.
In a research note released to clients last Friday, Goldman Sachs predict that the chancellor’s budget measures – and pre-budget hints about what’s to come – could knock up to 0.2 percentage points off the cost of borrowing (the ‘yield’ on a 10-year bond) for a decade.
They explain:
Given the modest downside impact on growth and inflation, plus the potential for increased credibility in the deficit path, we expect the budget measures to lower 10y Gilt yields by around 10-20bp, although given budget expectations are already forming we see this as a tailwind for Gilts into the budget more than the on-the-day reaction.
Goldman Sachs also point out that UK bond yields remain the highest in the G10.
They also expect tax rises in the budget, saying:
The upcoming budget is set to tighten fiscal policy by around £30bn, which our economists expect will mainly comprise tax increases, including freezing income tax thresholds from 2028, broadening the NI [national insurance] tax base, pensions and property taxes.
We expect limited spending cuts, but that the budget delivers a modest increase in headroom at the end of the forecast horizon.
Tax rises at Budget ‘inevitable’, thinktank warns
This month’s UK budget will include significant spending cuts and tax rises to tackle “a significant deterioration in the public finances”, thinktank the Resolution Foundation has predicted.
In a new report issued this morning, the Resolution Foundation predicts that Rachel Reeves’s fiscal headroom (the £10bn margin to keep within her fiscal rules) will have been more than wiped out by changes in the economic outlook, and government u-turns since March.
That will create “a bleak picture for the public finances”, they say, as the independent Office for Budget Responsibility is expected to downgrade the UK’s ‘trend’ productivity growth by 0.3 percentage points, creating a £20bn shortfall.
That downgrade will be partially cushioned by other changes, including stronger than forecast wage growth.
The think tank says:
The upcoming Budget is a make-or-break moment for the Government. It seems clear that this month’s fiscal event will include significant spending cuts and tax rises spurred by a significant deterioration in the public finances.
The Resolution Foundation urge Reeves to take steps to increase her headroom, to as much as £20bn, to send a clear message to markets that she is serious about fixing the public finances.
They have calculated that doubling the fiscal headroom to £20bn and allowing for cost of living support would require £31bn of fiscal consolidation. And with limited scope for spending cuts, tax rises of £26bn are therefore likely to be needed.
Avoiding touching the three big taxes – VAT, Income Tax and National Insurance (NI) – “risks doing more harm than good”, they argue (even though Labour promised in their manifesto not to raise them).
Resolution also argue that the chancellor could offset a 2p rise in Income Tax with a 2p cut in employee National Insurance, raising £6bn while protecting workers from these tax rises.
Their report concludes:
So, although tax rises are inevitable, there is a way to do them which comes with a boost confidence in the economy and the public finances, while also reducing child poverty and the cost of living.
James Smith, research director at the Resolution Foundation, said:
“The Chancellor should look to make sensible tax reforms to car taxes, dividends and capital gains. Switching 2p of employee National Insurance onto Income Tax would raise £6 billion while protecting workers’ wages
Introduction: Reeves to lay groundwork for budget tax rises
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
With just over three weeks until the UK budget, speculation is mounting that Rachel Reeves will rip up the government’s manifesto promises and raise income taxes.
The chancellor will deliver a speech this morning which is widely expected to pave the way for a tax-raising budget on 26 November.
Downing Street says Reeves will lay out the economic choices she will take at the Budget later this month to cut hospital waiting lists, cut the national debt and cut the cost of living.
The Chancellor is expected to say she will take the necessary choices to deliver “strong foundations”, and explain:
“It will be a budget led by this government’s values, of fairness and opportunity and focused squarely on the priorities of the British people:
“Protecting our NHS, reducing our national debt and improving the cost of living.
Reeves faces a choice between tax rises, spending cuts, or breaking her fiscal rules through higher borrowing because of a black hole in the budget – partly caused by a productivity downgrade would leave her with a £20bn gap to fill.
Last night, Keir Starmer told MPs the government would take “tough but fair decisions”, promising a “Labour budget built on Labour values” that would protect the NHS, reduce debt and ease the cost of living.
Mujtaba Rahman, managing director for Europe at consultancy Eurasia Group, says Reeves faces “an agonising choice” on whether to prioritise politics or economics.
He told clients:
The economics increasingly points to what Whitehall insiders are calling a “go big” strategy: another large tax hike, including on income tax, to close a gap of about £30bn to meet Reeves’s goal of balancing government spending and revenue by 2029-2030; however, abandoning the Labour manifesto promise not to raise income tax would leave the party wide open to Tory and Reform attacks.
Yesterday, Reform UK leader Nigel Farage rowed back on his party’s previous promise to deliver tax cuts, arguing it wasn’t realistic in the current economic climate.
The agenda
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8.10am GMT: Chancellor Rachel Reeves to deliver speech in Downing Street
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10am GMT: House of Lords committee inquiry on regulators and economic growth
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10am GMT: FCA CEO Nikhil Rathi speech at Fair4All Finance event on ‘delivering financial inclusion together”
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2:15pm GMT: Treasury Committee hearing on AI in financial services with new City minister Lucy Rigby
