UK markets reacted negatively to reports of a policy U-turn on planned income tax hikes, causing a selloff in long-dated gilts. Morningstar’s economist views this as a sign of the PM’s weakening authority. The government is expected to introduce alternative tax measures at the Autumn Budget to address fiscal challenges. Bond yields spiked before falling back, hinting at market uncertainty. The FTSE 100 index traded down in response, with banks and insurers taking a hit. The pound briefly fell against major currencies. Despite the income tax climbdown, other tax increases are anticipated at the Budget, with a focus on revenue-raisers like ‘sin’ taxes and income tax band tweaks. The government is under pressure to balance fiscal rules amidst economic uncertainty. The UK’s poor productivity and GDP performance add to the challenges. The public’s sentiment towards the PM remains divided, with calls for resignation amid political drama. The Budget is expected to feature modest revenue-raising measures, with potential changes to inheritance tax not ruled out. The government aims to satisfy fiscal rules while minimizing growth drag and encouraging investment.

Read more at Morningstar: UK Bonds, Stocks Slide After Rachel Reeves Income Tax U-Turn