Income Tax Hike Incoming
- Written by: Gary Howes
Picture by Simon Dawson / No 10 Downing Street.
Raising income tax significantly lessens the pound's vulnerabilities.
A definite supportive development for the under-fire pound has emerged on Wednesday, after Sir Keir Starmer effectively dropped his opposition to raising income tax.
When questioned if he would raise income tax in weekly Prime Minister's Questions, Starmer refused to rule it out.
Political commentators say this more than likely means the UK will see income tax raised in November.
"Starmer all but confirms Rachel Reeves is hiking income tax next month," says Daily Express correspondent Christian Calgie.
"Big moment at PMQs," says ITV's Robert Peston. "Keir Starmer refused to say he would stand by Labour’s manifesto promise not to raise income tax, national insurance, VAT or corporation tax. It is increasingly clear the budget will include a significant rise in income tax - because it is the only clean way, ministers believe, to fill the £35bn budget black hole."
Any decision to break the Labour manifesto promise not to tax the big 'earners' means the Chancellor, Rachel Reeves, now has a credible path to raising taxes to fill the budget deficit.
This significantly lowers the risk of an adverse market shock on any policy mistake stemming from November 26.
For the pound, we think this should go some way in limiting any risk premium.
However, the dashboard shows the pound hasn't recovered meaningfully from the selling spree of the past 48 hours, despite the news.
This is because tax hikes to the tune of approximately £30BN will potentially squeeze the economy and limit inflation.
With the inflation outlook turning more benign, the Bank of England will think it can cut interest rates more readily.
Rising bets for interest rate cuts are lowering short-term UK bond yields, whereas yields in comparable economies are staying steady. This development is pulling the pound under.
So even though there is some stability on the horizon, for the pound, it's a bit of a lose-lose right now.
Despite this, our call is that the pound will soon find its feet and recover into year-end as markets begin to anticipate the fading risks associated with the budget.
