The FTSE 100 plunged and borrowing costs swung wildly after Rachel Reeves’ Budget tax plans were thrown into chaos overnight. Following reports that the Chancellor will no longer raise income tax, the UK’s flagship stock index fell by 2pc on its worst day since Donald Trump’s “liberation day” tariff onslaught in April.
Government borrowing costs also surged and the pound declined amid fears that Ms Reeves will not be able to get the public finances under control. The yield on 10-year UK gilts – a benchmark for the cost of servicing the national debt – climbed at the fastest pace since July, when bond markets were sent into turmoil by the Chancellor’s tearful appearance in the Commons.
Bond prices have swung wildly since then, putting pressure on stocks, as Treasury officials released a flurry of mixed messages. Borrowing costs had eased slightly after Bloomberg reported that the Office for Budget Responsibility (OBR) had told Ms Reeves she will have a Budget black hole of around £20bn, less than the £35bn feared by economists.
However, bond yields jumped again when it was reported that the Chancellor only plans to extend the freeze on income tax thresholds in the Budget, rather than raising them. Andrew Wishart, senior UK economist at Berenberg, said the U-turn on raising income tax would lead to “smaller and messier fiscal tightening that risks this pre-budget media circus being repeated ahead of future fiscal events”.
John Stopford of investment manager Ninety One added: “Unfortunately, there appeared to be an opportunity to create a more positive backdrop and something of a virtuous circle for gilt yields and hence borrowing costs, but this now looks likely to be squandered.”