UK’s Reeves addresses speculation over tax rises in unusual pre-budget speech

U.K. Chancellor Rachel Reeves on Tuesday gave a clearer indication that tax rises are coming in her Autumn Budget later this month when she made a surprise speech from Downing Street this morning.

Reeves addressed speculation around her fiscal plans and told the British public that her budget will focus on “fairness and opportunity” but that there were “pressures on the public finances” that needed to be faced.

“There is a lot of speculation about the choices I will make. 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 circumstances we are facing, the principles guiding my choices – and why I believe they will be the right choices for the country,” she said.

Reeves said the U.K. had “considerable economic strengths” but that “years of economic mismanagement” by the previous Conservative government had limited its progress and potential.

She said her priorities were protecting the National Health Service, bringing down national debt and tackling the cost of living crisis, and that she was ready to make “the choices necessary to deliver strong foundations for the economy.”

“The choices I make in this budget, this month, will be focused on getting inflation falling, and creating the conditions for interest rate cuts to support economic growth and improve the cost of living.”

Critics of the government branded her speech as an “emergency press conference” given there was little indication it would take place until last night, but it was widely seen as an attempt to lay the groundwork for tax rises.

The chancellor faces difficult choices over after pledging to stick rigidly to her “fiscal rules” to make sure day-to-day government spending is funded by tax revenues and not borrowing, and to ensure public debt is falling as a share of economic output by 2029-30.

Reeves has repeatedly reiterated her commitment to her fiscal rules and did so again on Tuesday, saying it was “iron clad.” The yield on the U.K.’s benchmark 10-year government bonds, also known as gilts, fell almost 4 basis points to reach 4.405% during her speech, signaling that investors were placated by Reeves’ maintaining that position.

Reeves is due to set out the Autumn Budget on Nov. 26 and it’s widely expected that it will include tax rises despite the ruling Labour Party having pledged ahead of its 2024 election win, not to raise income tax, VAT or national insurance contributions.

The chancellor is also in hot water given that her last budget included around £40 billion’s worth of tax hikes with the burden largely falling on businesses and employers. Reeves had said the tax raid was a one-off. On Tuesday, the chancellor would not be drawn on the specifics around tax rises when journalists questioned where the axe could fall.

Along with Prime Minister Keir Starmer, she has in recent months dropped hints that tax rises might be coming, however. She told CNBC last month that she had “to be honest with people about the challenges that we face,” adding, “I will respond to those at the budget.”

Reeves faces an agonising choice on whether to prioritise politics or economics as she finalises her budget, Mujtaba Rahman, managing director of Europe at Eurasia Group, said in a note late Monday night.

“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 £30 billion to meet Reeves’s goal of balancing government spending and revenue by 2029-2030,” Rahman said.

While financial markets would welcome substantial fiscal consolidation, small-scale tax rises are unlikely to be enough, he said.

Labour will be very wary of abandoning its election manifesto promise not to raise income tax, however, and any moves to do so will leave the party wide open to attacks from opponents such as the Conservatives and increasingly popular party, Reform.

“While no decision has yet been taken, Eurasia Group believes that on balance it is now narrowly more likely that the chancellor will decide “go big” and breach the manifesto pledge on income tax,” Rahman said.

Financial markets are seen as a target audience for Reeves’ speech with the speech due to take place around the open at 8 a.m. London time.

“Tax hikes have been the topic of every conversation in the run-up to the Autumn Budget, and they’re clearly doing an operation to prepare the political and market ground for what is coming later this month,” Carsten Nickel, managing director at Teneo, told CNBC.