The bond market reaction suggests traders think this is in the offing
October 31, 2024 6:34 pm(Updated 6:35 pm)
Will Rachel Reeves’s big gamble work? The Chancellor’s first Budget was at least worthy of its long gestation: an audacious, high-spend, high-tax, very traditionally Labour affair intent on seeking to turn Britain around. And the response to this concoction is as you might expect. The party’s MPs and trade unions love it; businesses and Conservatives MPs loathe it.
There was no attempt to split the difference here. The path Wednesday’s statement has taken put the Starmer government on will likely define the rest of this Parliament.
The Chancellor’s Budget is based on a simple but high-risk stake: by ramping up borrowing and taxes to an enormous degree now, the sugar rush will improve the public realm, sustain more investment, boost growth and kickstart a more prosperous economy. Projections by the Office for Budget Responsibility suggest that growth will rise in the immediate term but then slump. Trying to weave a positive narrative from that has proven difficult.
Nearly all of the headlines since Wednesday have focused on how the tax raids are going to result in less money for working people, combined with a large drop in disposable income. Reeves may say this was all inevitable because of the inheritance from the last government. Yet there are clear choices on offer about tax and spending, and she made them. The main new announcement – a big cash injection for the NHS – might have been the Treasury’s hope for headlines, but the scale of the tax raid has crushed such stories.
The biggest backlash is one that the Treasury is unlikely to have predicted (as is often the way). Alongside other tweaks, Reeves announced the inheritance tax exemption for agricultural land will be limited to £1m. On paper this exemption might not make much sense, but it is the reason why so many British farms have been passed down through the generations. Smaller family operations can be handed down to keep the businesses going despite the economic challenges for agriculture. Neil O’Brien, a former Conservative government minister, acknowledged that the tweak had been examined before, yet the Tories decided it was too risky.
The reaction from sections of society that chancellors usually want to keep on board has been potent. Kirstie Allsopp, of Location Location Location fame, went as far to say the Budget had “f***ed all farmers” and accused the Government of having “zero understanding of what matters to rural voters”. Jeremy Clarkson, of Cotswold farming fame, said farmers had been “shafted” and described the Government as “hopeless”. The National Farmers’ Union have piled in too, labelling it a “disastrous Budget”.
It’s particularly galling for many newly elected Labour MPs. In Suffolk and Norfolk, for example, seats like Lowestoft and Suffolk Coastal that were surprise wins for the party are now likely to be at risk. Not only is this Budget actively harming their constituents, but they are facing Ed Miliband’s plans to pepper pylons across their green lands. There are few MPs representing rural constituencies at the top of the government – Environment Secretary Steve Reed represents the good burghers of Streatham and Croydon North, while Reeves’s Leeds West patch is home to relatively few farmers. It’s no surprise that the Treasury was out of touch.
Whether this mistake is overturned or not – raising the £1m threshold seems the most obvious solution – Reeves may have to contend with the much wider question about what happens if the Budget doesn’t work and growth doesn’t materialise.
The Chancellor has little (or no) interest in slashing taxes. There were also scant details on supply side reforms. Some might want to herald this as an investment-first Budget, yet until we see serious plans for new nuclear power stations or radical reforms of the planning system, the package risks deterring business interest in investment.
And then what does Reeves do? The simple answer is: come back for more. If the investment in public services does not result in a better outcome, she will come back to raise more taxes. That will likely come in the middle of this Parliament, when the typical midterm blues kick in and Labour’s popularity begins to sink. Having to raise taxes (and borrow) again at this point could prove politically disastrous. The bond market reaction suggests traders think this is in the offing.
At first, it seemed Reeves had got away with rewriting the fiscal rules and ramping up debt. A day later, the UK’s borrowing costs have risen to the highest level this year. The £28bn rise in government borrowing is likely to push up interest rates, forestalling any further rate cuts. The reaction has been so shaky that the 10-year borrowing costs are (at the time of writing) nearing the peak seen at the height of Liz Truss’s 2022 mini-Budget crisis.
Given how long this Budget has taken to pull together, it suggests something is not right with the Government’s political nous. Reeves’s only hope now is that 2024 is not 1974. The indications so far are that it might well be, and that a doom loop of tax and spend awaits. And in the meantime, it’s businesses and employers who will suffer if the big gamble fails.
Sebastian Payne is director of the centre-right think tank Onward