FILE PHOTO: Britain's Chancellor of the Exchequer Rachel Reeves takes journalists' questions after delivering a speech in the media briefing room of 9 Downing Street, central London, on November 4, 2025, ahead of the forthcoming Budget. JUSTIN TALLIS/Pool via REUTERS/File Photo
FILE PHOTO: A drone view of The Shard, Tower Bridge and the City of London at daybreak, in London Britain June 19, 2025. June 19, 2025. REUTERS/Yann Tessier/File Photo

By Andy Bruce

MANCHESTER, England (Reuters) -Confusing messages about Britain's budget this month are undermining the government's credibility, investors, businesses and think tanks said on Friday as bond prices tumbled following the latest surprise change of tone from Westminster.

Days after finance minister Rachel Reeves said the only way to stick to her fiscal plans without raising taxes on working people would be to slash investment, the Financial Times said late on Thursday that she had dropped a plan to raise income tax, a report that was confirmed later by a government source.

Reeves had seemed to pave the way for an income tax hike on November 4 - in what would be a breach of the Labour Party's 2024 election promises - when she gave an unusual pre-budget speech and said "each of us must do our bit".

The latest apparent U-turn capped a week of "government communication fiascos", said Andrew Goodwin, chief UK economist at consultancy Oxford Economics.

TREASURY PROMISES 'FAIR CHOICES' IN BUDGET

The government abandoned money-saving welfare reforms in July, a move that raised doubts over its willingness to take tough fiscal decisions. The latest reversal added to those questions, Goodwin said.

Comments by a government source that Britain could drop the income tax plan because of an improved forecast from its official budget watchdog also raised questions over the credibility of those assumptions, Goodwin said.

Ben Zaranko, associate director at the Institute for Fiscal Studies, said the back-and-forth around the budget was a by-product of the tiny margin for error that Reeves left herself against her pass-or-fail fiscal rules.

"This is not a remotely sensible way to guide policy," Zaranko said. "I think it leads to policy being rushed. I think it leads to policy being more volatile."

A Treasury spokesperson declined to comment on specific tax policy measures but said the budget on November 26 would make "fair choices to build strong foundations to secure Britain's future" and Reeves had committed to creating enough fiscal room to withstand turbulence in the global economy.

CBI SAYS UNCERTAINTY DETERS INVESTMENT

Business leaders also expressed concern about the latest change of tone from the government.

The Confederation of British Industry said it was worried that Friday's reports meant the budget would include "small tweaks" to a range of taxes that would cast uncertainty over companies, instead of a large hike to income tax that has more predictable effects in terms of revenues.

"If you put yourself in the boardroom of a business trying to make investment decisions and they suddenly see the headlines this morning - why would they not then wait (longer) to make another decision?" asked Mohammad Jamei, director of economic policy at the CBI.

"Utterly depressing," said a senior FTSE-250 company executive, who asked not to be named because of the political sensitivity of the issue.

The return of a piecemeal approach to tax increases would also worry financial markets, said John Stopford, head of managed income at investment manager Ninety One, which has around 151 billion pounds ($202.66 billion) under management.

"In part because this is viewed as less credible, but also because they suggest that the chancellor doesn't have the support of her party to make difficult decisions," Stopford said.

BOND YIELDS SHOT UP

Jane Foley, head of FX strategy at Dutch bank Rabobank, said Reeves' apparent change of heart had "undermined her credibility and UK assets are reacting accordingly".

Long-dated British government bond yields on Friday shot up by around 16 basis points, their biggest rise since July 2, when a tearful appearance by Reeves in parliament spooked investors.

"It looks like they said all the right things to get gilt yields down, get the OBR projections in the right place - and all of a sudden, they find capacity within the projections to then walk back the policies," said Simon Harvey, senior economist at LB Macro, a consultancy that advises some of the world's biggest hedge funds.

The 2022 economic agenda of former Conservative prime minister Liz Truss, which triggered a crash in the gilt market, remains fresh in the minds of investors. The episode still casts a lingering shadow over the credibility of Britain's government finances.

Stephen Millard, deputy director of the National Institute of Economic and Social Research think tank, said Reeves had to build enough headroom against her fiscal rules to restore certainty to budget policy.

"If you have a nice, big buffer, then there's no sense that small changes are going to affect your ability to make your fiscal rules," Millard said.

"And if that is then the case, the chancellor doesn't need to speak as often, communication becomes easier ... and you don't get this endless speculation that we've seen for the past 12 months."

($1 = 0.7451 pounds)

(Additional reporting by Sarah Young; Editing by William Schomberg and Alison Williams)