UK’s Reeves Seeks to Calm Markets After Post-Budget Selloff
(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves sought to reassure the financial markets after her budget on Wednesday triggered a selloff in UK bonds, saying that the “No. 1 commitment” of the Labour government is “economic and fiscal stability.”
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“We have more headroom than the previous government left us, and that is important,” Reeves said Thursday in a Bloomberg TV interview, referring to the margin by which she meets her self-imposed fiscal rules. “We have now put our public finances on a stable and a solid trajectory.”
The negative market reaction has come as traders digested the scale of the borrowing implied by Reeves’ budget. The chancellor’s package of measures included a £70 billion ($90 billion) annual increase in public spending and an extra £100 billion of expenditure on capital projects. Official projections suggest around an extra £142 billion of borrowing will be needed over the next five years as a result.
With many investors considering it an inflationary budget, markets are now pricing in higher interest rates from the Bank of England for longer.
Defending her plans, Reeves said she would stick to “robust fiscal rules” and that there is a “significant” fiscal consolidation over the course of this Parliament. The chancellor’s two main rules are to have tax receipts cover day-to-day spending and for debt to be falling as a share of the economy.
“We meet both our stability and our investment rule two years early,” Reeves said. “That should give confidence, alongside what the International Monetary Fund said yesterday,” she added, referring to the IMF’s endorsement of her plans to boost public investment.
Rising gilt yields are politically sensitive for Reeves given how often she has criticized former Tory Prime Minister Liz Truss’s infamous so-called mini-budget in 2022, which triggered a selloff and forced the Bank of England to intervene to prevent a key part of the pensions industry from collapsing.
Though the market movements this week don’t compare with the fallout from Truss’s plan for unfunded tax cuts — yields on the UK’s 10-year benchmark government bond rose roughly 100 basis-points in the three days following Truss’s plan, compared to the roughly 25-basis-points increase since Reeves’ budget was announced — it’s still a hit to Labour’s claim to have restored stability to Britain’s finances.
Higher UK government borrowing costs are an economic headache for Reeves because they worsen Britain’s mounting debt interest bill, putting extra pressure on the UK’s still-fragile public finances. The gilts selloff comes despite her efforts to prepare the markets for her plans: Reeves signaled her intentions while at the IMF’s annual meetings last week, including her plan to change the debt measure targeted by the government to free up more space for borrowing.
The selloff in gilts ripped through other UK assets on Thursday. The pound fell to its lowest since August and homebuilders led a selloff in UK shares. Taylor Wimpey Plc dropped 5.6%, the most in two years, while Persimmon Plc dropped 6.7% and Barratt Redrow Plc slid 5.9% as swaps rates that are used to price mortgages spiked.
Among fiscal measures announced by Reeves in her budget — which raised taxes by more than £40 billion a year, the most since 1993 — the government increased the minimum wage as well as raising a tax on employers known as national insurance. The Office for Budget Responsibility said the total package would add 0.4% to inflation over the next two years and lift the BOE rate by a quarter-point over what investors were expecting.
One of the criticisms Reeves has faced over her budget — alongside a backlash from farmers and disappointment over the impact on living standards — relates to its growth impact. Despite the new spending she unveiled, the OBR projected the economy would be 0.1% smaller in 2029 than forecast in March under the former Tory government. The OBR said Reeves’ tax hikes were to blame.
“The growth forecasts aren’t the summit of my ambition,” Reeves said. “We are doing planning reform, pensions reform, skills reform, to get our country growing again. We’re unlocking long-term patient capital to help small businesses and start-up and scale-up businesses to grow. All of that could have a big impact on growth.”
Reeves is also facing questions over whether she’ll have to increases taxes further at future budgets. That’s because she’s only given herself £10 billion of headroom against her day-to-day spending fiscal rule, a margin near historic lows, meaning she’d need to find extra tax hikes if there was a deterioration in growth forecasts or if she wanted to fund more generous public spending plans. The Institute for Fiscal Studies think tank said that’s a realistic prospect because her current spending plans assume £9 billion of real-term cuts for unprotected departments which are unlikely to be delivered.
Reeves refused to rule out the prospect of future tax hikes, while also saying she had “wiped the slate clean” with her first budget.
“No chancellor is going to be able to tie their hands in that way,” Reeves said on the question of future tax increases. “But it was a significant budget yesterday, because we had to wipe the slate clean after the economic mismanagement, the chaos and instability from the previous government. No government should have found themselves in the position that we did, having to clear up that mess. We’ve now done that and we can move on.”
--With assistance from Greg Ritchie, Irina Anghel and Alex Wickham.
(Updates with more details, quotes from twelfth paragraph.)
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