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Alex Wickham, political editor for Bloomberg UK, posted on his X account that “Rachel Reeves received an improved fiscal forecast from her budget watchdog putting the fiscal hole at £20 billion, leading her to drop plans to raise income tax rates according to people familiar with the matter”. “The latest update from the Office for Budget Responsibility moved in a significantly better direction due to the strength of receipts and stronger wage performance.
As well as filling the £20 billion gap, Reeves is still expected to deliver headroom against her fiscal rules of between £15 billion and £20 billion”.
“An expected productivity downgrade from the OBR has been partially countered, the people said.
Reeves’ strategy for budget has not changed and major tax rises are still expected to fill the remaining hole in the public finances, they added.
Reeves will likely lower income tax thresholds at the budget and raise significant taxes from salary sacrifice schemes, they said.
The chancellor was prepared to break Labour’s election promise not to raise income tax rates if necessary to fill the hole, but the better fiscal forecast now meant that was not necessary, the people said”. LSEG data shows that traders trimmed their BoE rate cut bets from 64 bps yesterday to 58 bps now. The probabilities for a December cut are still around 80%, but we still have two UK CPI reports and one employment report before the next BoE meeting.
This article was written by Giuseppe Dellamotta at investinglive.com.
💡 DMK Insight
The UK’s fiscal forecast just got a boost, and here’s why that matters: a £20 billion gap means no income tax hikes, which could influence market sentiment. For traders, this news could shift focus towards UK equities and the pound. With Reeves dropping tax increase plans, consumer spending might see a lift, positively impacting sectors like retail and services. Watch for potential bullish momentum in FTSE 100 stocks as this news settles. However, keep an eye on the broader economic indicators; if inflation remains stubborn, the Bank of England might still have to act, which could create volatility. The flip side? If the forecast changes again or if fiscal measures don’t stimulate growth as expected, we could see a quick reversal. In the short term, monitor the GBP/USD pair for reactions, especially if it breaks resistance levels. A close above recent highs could signal further strength, while a failure to hold could lead to a pullback. Timing is crucial here—stay alert for any economic data releases that could impact sentiment.
📮 Takeaway
Watch GBP/USD closely; a break above recent highs could signal bullish momentum, while any negative shifts in fiscal forecasts could lead to volatility.
