Reeves must raise tax and cut spending, markets say

U.K. Finance Minister Rachel Reeves is walking a tightrope as her critical Autumn Budget looms, as pressure mounts to appease voters, shore up public finances and convince money markets her policies are sound.

Thanks to her self-imposed fiscal rules, which she has doubled down on in recent weeks, Reeves has been left scrambling to find strategies that can plug a multi-billion-pound hole in public finances by the time she delivers the budget on Nov. 26.

That means drastically cutting spending or breaking a manifesto pledge not to raise certain taxes — or a combination of the two.

CNBC takes a look at some of the options on the table.

The finance minister has been considering a range of ways to shore up public finances, according to recent reports from local media outlets, including taxing dividends, cutting tax breaks for salary sacrifice schemes and imposing higher levies on certain professions.

Any move to raise taxes would be unpopular.

A September YouGov poll of more than 6,500 Brits found almost one in three adults believes Reeves should avoid raising taxes in the budget, even if it means cutting spending or borrowing more. A separate YouGov poll found that more than half of 3,980 British adults believe Reeves should prioritize keeping the government’s promises not to hike taxes over pledges not to ramp up borrowing.

However, some within money markets would welcome tax hikes. On Friday, gilts sold off as investors reacted to reports that Reeves would U-turn on income tax rises that had been planned as part of the budget.

“How can this statement simultaneously promote growth whilst having to cut spending and increase the tax burden to keep bond investors happy?” Toni Meadows, head of investment at BRI Wealth Management, told CNBC at the time.

Brian Mangwiro, managing director of global sovereign debt and currencies at Barings, told CNBC his team is expecting Reeves to announce some form of tax rises at the budget later this month — a move that he said will be positive for U.K. government bonds, otherwise known as gilts.

Barings is taking a constructive stance on gilts amid a loosening labor market, softening wage growth, hopes that inflation is peaking and an assumption that the Bank of England will continue to cut interest rates through 2026.

“A fiscally responsible Budget will be an additional tailwind,” Mangwiro said by email. While he argued that the U.K.’s tax burden will likely rise to new records, Mangwiro said he expected financial markets to be a beneficiary of new or increased duties.  

“We expect additional revenues to be channeled towards investments given the government’s pro-growth agenda,” he said. “This will hopefully raise the U.K.’s productivity over the medium term.”

Stuart…