UK long-term borrowing costs reached a post-election high, with investors closely watching Rachel Reeves' first Budget as Chancellor. Reeves aims to channel tens of billions towards growth-focused projects like hospitals, green energy, and transport, marking a historic fiscal stance. Reeves' approach, which draws comparisons to transformative Labour budgets like those in 1945 and 1964, is expected to relax fiscal rules, potentially adding £20 billion in annual borrowing.
Key to her strategy, Reeves plans to implement guardrails, ensuring funds target long-term growth while aiming to stabilize the economy. She emphasizes that investment is central to economic recovery, stating, "The only way to drive economic growth is to invest." Still, investor caution remains over gilts issuance, which has driven the 10-year yield to its highest level since Labour’s July election win.
Tax Rises for Wealthy and Employers
Reeves’ Budget is set to impose one of the largest tax increases on employers and high earners, including non-doms, private equity, and private schools. This is to fill a £40 billion funding gap and meet her "golden rule" of covering current spending through tax revenues within five years. National insurance will see a substantial hike, expected to generate £20 billion, while income tax thresholds may freeze past 2028, raising an additional £7 billion annually.
Despite market concerns, Reeves remains confident these measures won’t trigger a mass exodus of the wealthy. Officials suggest some may welcome her balanced approach, which contrasts with earlier, more restrictive Conservative fiscal policies.
Economic Growth Outlook and Comparisons to Previous Labour Governments
The Office for Budget Responsibility (OBR) forecasts a conservative growth rate of 0.8% for 2024 but projects a jump to 1.9% in 2025. These projections are under scrutiny, given higher expectations from the Bank of England and other economists. Reeves intends to parallel Labour's historic budgets, likening her plan to Tony Blair’s government in the 1990s, which focused on social repair. Her tax and investment policies aim to restore confidence by addressing Britain’s fiscal needs through substantial growth-driven borrowing.
Challenges and Political Dynamics
While Reeves’ Budget marks Labour’s first since 2010, it comes at a time of mixed public sentiment. A recent survey revealed that terms like “worried” and “nervous” are commonly associated with the upcoming Budget. Prime Minister Keir Starmer has also faced criticism for his economic outlook, which some say has dented consumer confidence and his popularity.
Former Chancellor Jeremy Hunt, meanwhile, contests Reeves' claim of inheriting a £22 billion fiscal deficit, an issue the OBR will address in its report. As Reeves unveils her Budget, its reception will likely influence both investor sentiment and the Labour government’s longer-term economic credibility.
Source: (FT.com)
