Since the Liz Truss debacle, chancellors have lived in fear of the bond market. Has Rachel Reeves kept it sweet?
- The Office for Budget Responsibility called it “one of the largest fiscal loosenings of any fiscal event in recent decades”.
- Reeves has backed up spending pledges with tax rises.
- Leaks meant that there were no big surprises on budget day.
Chancellor Rachel Reeves had many people to please in her first budget yesterday, but perhaps the most important stakeholder was the bond market. Ever since Liz Truss in 2022, it has been clear that bond markets have the power to make or break a budget and chancellors need to tread carefully.
Reeves budget had some similarities with the Truss budget. It raised borrowing significantly. The Office for Budget Responsibility called it “one of the largest fiscal loosenings of any fiscal event in recent decades”. Borrowing is expected to increase by £28bn over the parliament. Reeves changed the fiscal rules to allow this borrowing to happen.
However, this is largely where the similarities ended. Unless Truss, Reeves has involved the OBR from the start, has not fired a senior Treasury minister for his pursuit of ‘economic orthodoxy’ and has backed up spending pledges with tax rises – from raising employer National Insurance, plus tweaks to capital gains and inheritance tax.
Reeves had also assiduously prepped the market. Although she was told off by the speaker of the house for budget leaks, those leaks meant that there were no big surprises on budget day and, if anything, the result was a little better than many had expected. The employer NI rise had been significantly trailed in advance, as had changes to CGT and IHT.
The overall result was that bond markets were grumpy and volatile, but did not move significantly on the day. Initially, gilt yields fell in response to Reeves saying that she would fix Britain’s public finances and eliminate the government deficit on day to day spending within three years, but ticked up by the end of the day as the scale of borrowing was revealed.
The 10-year gilt yield rose 0.04 percentage points, to end the day at 4.36%. This is significantly higher than its level in September, when gilt yields dipped as low as 3.76%, but still lower than their level in May. Fund managers still see some value in gilts, though are taking advantage of volatility. For example, David Roberts, head of fixed income at Nedgroup Investments said he took advantage of the initial rally and sold his entire gilt exposure, buying back when the market then sold off.
The spending pledges are likely to lift inflation, albeit only fractionally. On balance, markets still expect a rate cut from the Bank of England in November, and potentially a second one in December. The Reeves budget may have its risks, but comparisons with the Liz Truss debacle are wide of the mark.
