31 October 2024 - 6:30pm
When Rachel Reeves rose to address the House of Commons on Wednesday, yields on the 10-year gilt stood at 4.25%. By Thursday afternoon, some 24 hours later, they were up to 4.5%, while the pound fell.
Obvious parallels to the catastrophic Liz Truss-Kwasi Kwarteng mini-Budget of two years ago immediately came to mind. For the moment, though, it seems unlikely we’ll experience a full-on market crash of the sort that happened then. For one thing, reforms to the pension system which followed that event should staunch the kind of panic-selling which broke out during the Truss premiership.
For another, unlike the 2022 mini-Budget, this Budget doesn’t raise debt on the spurious grounds that tax cuts will supercharge growth — a belief which required a faith in Truss’s genius that investors didn’t share. Reeves has altered the fiscal rules, but has done so in such a way that she will only borrow against assets, ensuring that the extra debt is accounted for in new wealth. Critically, she didn’t sideline the Office of Budget Responsibility, which was called in to mark her maths and show how the figures added up.
In fact, the initial reaction in markets was quite positive. During the course of Reeves’s speech, bond yields actually fell as investors concluded her Budget, while painful in its increased tax burden, was at least sensible and plausible.
Her problems began after she sat back down and the OBR released its assessment. The critical point seemed to come in its conclusion that while her Budget would provide a short-term boost to the economy, its long-term growth impact would be negligible. More bad news came the next day when the respected Institute for Fiscal Studies produced its own assessment of the Budget, and expressed doubts it would work. In particular, the IFS worries that the Chancellor’s maths may not add up after all, and that Reeves will be forced to return to Parliament with more tax rises in the future. The Resolution Foundation joined the pile-on when it issued its own forecast that household incomes would barely budge over the life of this parliament.
As justifiable as tax rises to rebuild public services might be, Reeves appears not to have convinced everyone she has a strategy to relaunch economic growth. She claims that her investments, including in a restored National Health Service, will themselves raise productivity and crowd in private investment. In this, the Chancellor is backed by some economists and the International Monetary Fund. But investors seem unpersuaded, and are thus demanding more generous terms if they are to continue lending to the Government.
Even if a full-on panic is averted, the rise in interest rates, should it continue, will further complicate the Government’s budgeting, and potentially crimp the recovery in the economy as well. There are more measures Reeves can take to support growth which don’t involve spending money, such as tax and planning reforms. However, the most important thing any British government could do is improve upon the trade deal negotiated with Europe after Brexit, whose only remaining defenders today seem to be those who negotiated it.
Yet so far, both Reeves and Prime Minister Keir Starmer have resisted reopening that file, for fear of antagonising Labour’s Brexit supporters. However, if she fails to convince bond markets that she has a plan which will succeed in re-energising the British economy, she may be forced in due course to abandon this timidity. Otherwise, her party may suffer the consequences at the next election.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).
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