UK markets reacted negatively to reports of a government policy U-turn on planned income tax hikes at the Autumn Budget, leading to a gilt selloff in longer-dated bonds. The senior economist at Morningstar suggests that further tax increases are expected to fill the public finances gap. The FTSE 100 index traded down 1.28% at mid-morning.

The Treasury is reversing an earlier plan to increase income tax rates, breaching the Labour Party’s election manifesto pledge. The chancellor, Rachel Reeves, faced economic uncertainty and had to rewrite the government’s finances to meet fiscal rules. Rising gilt yields have increased government borrowing costs to over £100 billion a year.

Despite the income tax climbdown, the government is expected to raise other taxes in the Autumn Budget. The focus is on minimizing the near-term drag on growth with tax increases rather than spending cuts. The Budget may include revenue-raisers like higher ‘sin’ taxes, income tax band tweaks, and a potential levy on bank income from reserves.

Read more at Morningstar: Gilts, Stocks Slide on Reports of Rachel Reeves Income Tax U-Turn