Britain’s Reeves paints a confusing picture as pressure builds from all sides

This report is from this week’s CNBC’s UK Exchange newsletter. Like what you see? You can subscribe here.

The dispatch

Some 84 days after announcing the date of her second Budget, Rachel Reeves, Britain’s chancellor of the Exchequer (finance minister), will finally unveil her plans next Wednesday.

The intervening period has been unlike any previous Budget. Once, chancellors entered a period of “purdah,” during which they made no public policy pronouncements. This was to maintain the integrity not only of the Budget process but also stability in financial markets and was strictly adhered to.

Indeed, Hugh Dalton, a predecessor from Reeves’s Labour Party, resigned in November 1947 after sharing sensitive details of his Budget with a journalist before announcing it to the House of Commons. The measures, including raising duty on a pint of beer by a penny (78p in today’s money), were published before he delivered his speech.

Even recently, the best the newspapers could expect was a picture of the chancellor walking their dog shortly before the big day (Nigel Lawson, who held the post from 1983 to 1989, particularly liked this and even named one of his dogs “Budget.”)

But that is in the past. This century has frequently seen brazen leaks of likely Budget announcements, although most chancellors hold back something new for the day, akin to a magician producing a rabbit from their hat.

This Budget, though, has been characterized by regular “kite flying,” in which Budget measures under consideration were leaked to see how they would land with the media and public.

It has been an extraordinary period. In the most flagrant breach of the old convention, Reeves gave a “scene setter speech” on Nov. 4 during which she indicated she would break Labour’s commitment last year not to raise income tax rates. The message was reinforced six days later in a BBC interview.

Astonishingly, the following Thursday evening, the Financial Times reported on a spectacular U-turn. It said that, as the latest fiscal forecasts produced for the Treasury by the independent Office for Budget Responsibility had been better than expected, Reeves would not break her manifesto commitment after all. The Treasury confirmed this with a nod and a wink to the rest of the media that night.

A £30-billion fiscal hole

It has been Budget-making via megaphone and the markets have reacted to every leak.

And not just markets: Rightmove, the U.K.’s biggest property portal, said on Monday this week that average asking prices on homes for sale had fallen by 1.8% during the last month amid uncertainty over possible tax increases.

The same day saw Genuit, a construction industry supplier, issue a profit warning in which it blamed Budget uncertainty. Yesterday brought a profit warning, for similar reasons, from the housebuilder Crest Nicholson. Myriad surveys suggest the uncertainty has harmed both consumer confidence and business investment.

The long build-up means Reeves has not lacked advice, particularly around her main challenge, which involves either raising taxes or cutting public spending in order to stick to her fiscal rules: to balance current spending and revenues by the end of this parliament in 2029 and to reduce the U.K.’s debt-to-GDP ratio.

Policy Exchange, a free-market think tank which strongly influenced recent Conservative governments, has urged radical measures to “tame public spending” including freezing the state pension and working age benefits for three years, introducing a “small fee” to visit a doctor and “eliminating some green subsidies as part of a less rushed pathway to Net Zero.”

Yet with spending cuts seemingly vetoed by the Parliamentary Labour Party (PLP), which is to the left of Reeves and Prime Minister Keir Starmer, the government still has a fiscal hole of between £25 billion ($33 billion) and £30 billion to plug, presumably with tax increases.

The CBI, the leading employers’ organization, has warned Reeves not to repeat last year’s raid on commerce, now business taxation is at a 25-year high. It has called for reforms of the tax system to support growth, including income tax, VAT and property taxation, along with measures to boost competitiveness, such as fast-tracking infrastructure investment and addressing the U.K.’s high energy costs.

Others calling for tax reforms include the Financial Times, which has urged a shake-up of property taxes including the abolition of stamp duty and council tax — the latter of which partially funds local government — and its replacement with an annual property value tax.

The latter move has also been suggested by Dan Neidle, founder of Tax Policy Associates, an increasingly influential think tank. He also recommends reform of personal taxation to remove so-called “cliff edges,” such as the one under which workers earning between £100,000 and £125,140 pay a marginal tax rate of 62% due to the tapering away of the personal allowance (the £12,570 Britons may earn tax free each year).

The Institute for Fiscal Studies, arguably the most respected independent economic think tank, has also urged Reeves not to rely “on badly designed taxes to bring in additional revenue,” but to “be bold and take steps towards a system that does less to impede growth and works better for us all.”

The advice most likely to be taken, though, will be that of the Resolution Foundation (RF), a left-leaning think tank previously headed by Torsten Bell, the junior minister coordinating the Budget alongside Dan Tomlinson, another RF alumnus.

It has urged, among other things, scrapping the cap that restricts payments of child benefit to the first two children, at a cost of £3.5 billion; moving social and net-zero policy costs into general taxation, costing another £3.5 billion; extending the freeze in personal tax thresholds, raising £7.5 billion if done for two years; and reducing the VAT threshold, raising £2 billion.

All these are thought likely.

Such has the RF’s influence grown in recent years that most tax changes made by the Treasury now include some form of distributional analysis highlighting “progressivity,” in other words, demonstrating that better-off taxpayers are paying a larger proportion of their income.

This has left the top 1% of earners paying 29% of all income tax and left those on average earnings paying less personal tax, as a proportion of income, than at any point in the last 50 years.

The problem Reeves has — amid reports that wealthy former “non-doms” are fleeing the country — is that the tax system is now coming up against the limits of that policy. Tax increases for the broader population look increasingly likely even if this year’s proposed income tax increase has been abandoned.

But the obsession with progressivity means that some measures which genuinely would boost growth, such as addressing the £100,000 cliff-edge, are likely to be off-limits if they are deemed to be a bung for the rich.

It is, unfortunately, likely to leave the U.K.’s tax system riddled with distortions and anomalies.

Top TV picks on CNBC

Reports emerge that U.K. Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves have ditched manifesto-breaking plans to hike income tax — potentially one of the most significant U-turns in recent memory.

U.K. Economic Secretary to the Treasury, Lucy Rigby, joins CNBC’s Squawk Box Asia to highlight the government’s efforts to boost investment and revitalize capital markets.

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— Holly Ellyatt

Need to know

UK’s Finance Minister walks a tightrope for upcoming Budget. There’s a multi-billion-pound hole in the country’s finances that Rachel Reeves has to fill — and she has to unveil strategies to do so, such as tax hikes or spending cuts, when she delivers the budget on Nov. 26.

Scotland plans to issue its first sovereign bonds. The “kilts” — a play on the U.K.’s “gilts” — are part of a planned £1.5 billion ($1.97 billion) bond program set to roll out in 2026/27. Ratings agency gave the Scottish government the same ratings as the U.K.

[PRO] A top macro-commodity play? According to Stephen Yiu, chief investment officer at Blue Whale Capital, a U.K. fund, this U.S. stock is a key portfolio pick, even though the commodity it is linked to has fluctuated in price recently.

— Yeo Boon Ping, Holly Ellyatt

Quote of the week

In the markets

London’s FTSE 100 retreated from record highs over the past week, amid mounting concerns relating to an AI bubble forming in equity markets. As global stocks were gripped by a sell-off, the U.K.’s benchmark index lost 3.8% in the seven days to Tuesday.

U.K. government bonds — known as gilts — have also seen volatile trade. Yields on gilts across the maturity curve spiked on Friday amid reports Finance Minister Rachel Reeves had abandoned plans to raise income tax rates in the Autumn Budget.

The yield on the U.K.’s benchmark 10-year gilt added 2 basis points on Tuesday to trade at 4.557%.

As investors look ahead to the critical budget next week, sterling was little changed versus the U.S. dollar. By the end of European trade on Tuesday, the pound was trading at around $1.314.

— Chloe Taylor

Coming up

Nov. 19: U.K. inflation data for October
Nov. 21: GfK consumer confidence data for November
Nov. 26: The 2025 Autumn Budget is announced

— Holly Ellyatt