File image of Chancellor Reeves. Picture by Kirsty O'Connor / Treasury.
Pound to euro rate down 0.40% @ 1.1292
Pound to dollar rate down 0.30% @ 1.3150
The British pound is falling further into the red as the government looks set to deliver a monumental climbdown on taxes.
Pound exchange rates and gilts could come under extended pressure in coming days after news Chancellor Rachel Reeves abandoned plans for a manifesto-breaking rise in income tax.
The decision means the government is at real risk of failing to meet its fiscal rules designed to keep a lid on UK debt growth.
"Watch the gilt markets and sterling this morning after the uk income tax climb down," says Kathleen Brooks, analyst at XTB. "Big unfunded spending plans don’t sit well with bond traders."
The Financial Times says the decision to leave income taxes unchanged was communicated by the Treasury to the Office for Budget Responsibility on Wednesday.
According to the report, Reeves will instead raise revenue by lowering the threshold at which people pay higher rates of income tax.
Also, a "smorgasbord" of smaller measures is now under consideration that points to a messy, multi-pronged attack on earners and the productive sector at the November budget.
Above: Pound-euro falls below 1.13.
Why This Matters to the Pound
"Good grief," says Julian Jessop, a noted economist. "This latest and biggest U-turn is presumably a political decision, made by No.10 to try to save Starmer, which risks shredding any credibility with the markets."
Raising income tax was the most credible route to raising the estimated £30BN required to put the government's fiscal trajectory back on a credible path. We have reported that although it would be difficult for workers to swallow, for the pound it was a 'least-bad' move.
This is because income tax is one of the three big tax earners, alongside VAT and National Insurance, meaning it would credibility provide the revenues to stabilise the finances.
Above: Why income tax matters - it's a big source of revenue.
By targeting smaller tax sources, Reeves risks shifting taxpayer behaviour and actually receiving less revenue.
These taxes also risk hurting the economy, as did the national insurance tax increase in the previous budget, which has driven up unemployment in recent months.
For the pound, this is a reminder that November 26 is a high-risk event and further weakness is possible.
"The likely alternative is some combination of lowering the tax thresholds (breaching the spirit of the manifesto, if not the letter) and an even bigger dog's breakfast of smaller tax changes mainly targeting the 'wealthy' (many of which had been rejected as too harmful)," says Jessop.
"It is now going to be much harder to make the sums add up," he adds.