The Budget has calmed the gilt market for now, but it does little to address the country’s long-term fiscal sustainability.
- UK 10-year gilt yields ended the day lower at 4.43%.
- Changes to issuance from the Debt Management Office also had an impact.
- The Chancellor’s plans rest on optimistic forecasts.
Rachel Reeves needed to quell a number of restive forces in the Budget, but the bond market remained the most important. If this is the only measure, the Budget might be called a qualified success, with UK gilts shaking off their worries about a U-turn on income tax. It may also be that the tax-and-spend Budget delivered so few growth prospects that it makes interest rate cuts more likely.
UK 10-year gilt yields ended the day lower at 4.43%, moving towards the low levels of early November. The biggest risk for Rachel Reeves was that the market would not believe her tax raising measures would balance the books, particularly in the absence of any spending restraint. It did – for the time being at least.
There were other factors on her side. Rob Gall, head of market strategy at Insight Investment, points out that changes to issuance from the Debt Management Office also had an impact, with 30-year gilts benefiting from three cancelled auctions for long maturity gilts.
Nevertheless, Gall says there are still longer-term concerns for gilt investors. “While the fiscal rules are technically met, and headroom projected at around £22 billion in five years, the Chancellor’s plans rest on optimistic forecasts. Tax thresholds will remain frozen until 2031, pulling more workers into higher-rate bands over time. A crackdown on fraud is expected to raise £10 billion by 2030, and ‘efficiencies’ are forecast to deliver £4.9 billion by 2031 – targets that look neat on paper but will be hard to realise.”
Rupert Harrison, UK senior advisor at PIMCO, agrees: “Despite an immediate relief rally in gilts, the Budget has incrementally added to medium-term concerns about this Government’s ability to control spending and deliver the falling deficit path set out in the OBR forecasts. By adding to spending, loosening fiscal policy over the next three years, and backloading the tax rises and spending restraint needed to hit the fiscal rules in 2029, the Chancellor is asking markets to trust her commitment to be fiscally prudent in the future, just not yet.”
The problem, ultimately, may be the lack of any credible growth plan. Weakening labour markets and lower inflation may help keep bond markets in check for the time being, but they do little for the long-term structural problems in the UK’s finances. Also, the average maturity of UK debt has shortened in recent years, leaving the economy more exposed to refinancing risk. The real boost for the gilt market might be that the UK is less dependent on borrowing, and there are few signs of that happening.
