- Rising borrowing costs challenge Rachel Reeves’ budget
- Business confidence falls due to tax hike fears
- Bond market pressure limits Labour’s investment plans
Rachel Reeves is facing a budget headache as government borrowing costs rise and business confidence falls amid concerns about sky-high debt and soaring taxes.
Bond yields have risen dramatically in recent days, reaching their highest level since Labour took power, a sign of global market concern over the Chancellor’s intentions.
Reeves has been told that she is walking a ‘tightrope’ to meet her expenditure targets while avoiding a repetition of the bond market disaster following the Liz Truss mini-budget two years earlier.
‘Investors are concerned that Labour will fund additional investment with more debt,’ said Elias Haddad, a senior markets strategist at private investment bank Brown Brothers Harriman.
Borrowing costs have also risen due to predictions that the Bank of England will only gradually reduce interest rates.
At the same time, confidence is dwindling as firms prepare for many tax increases that might stifle investment and kill jobs.
The Institute of Chartered Accountants in England and Wales (ICAEW) has released the most recent poll demonstrating the economic impact of Labour’s doom and gloom policies.
The group’s business confidence monitor, a quarterly poll of corporate attitude, dipped for the first time in a year in the three months following the general election.
Suren Thiru, ICAEW economics director, stated that ‘fears of a harsh Budget’ on October 30 have ‘dented business confidence’.
The British Chambers of Commerce, Confederation of British Industry, and the Institute of Directors have all issued similar concerns.
Reeves has been chastised for downplaying the economy, claiming Labour has inherited the ‘worst set of conditions since the Second World War’ and pinpointing an apparent £22 billion black hole in public budgets.
The Chancellor needs help to generate revenues to close the gap and support her expenditure proposals. She could modify her borrowing and debt regulations to make room for increased investment.
However, the risks associated with such a move have been emphasized on the bond markets, with the ten-year gilt yield reaching 4.22 per cent yesterday, its highest level since the election.
They were hovering at 3.75% in mid-September.
The 30-year gilt yield, another important indicator of how much it costs the government to borrow on overseas markets, surpassed 4.75 per cent yesterday for the first time since Labour came to office.
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Neil Wilson, chief markets analyst at broker Finalto, stated: “Labour may well want to change the debt rule to allow for more borrowing for investment.” The bond market might not let them. The recollection of the Truss panic remains clear.
Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said: “Reeves needs to walk a tightrope, or the gilt market will limit her ability to deliver much of Labour’s agenda.”
Reeves has already scaled down measures to obtain additional funds from non-doms and private equity employees, and a planned raid on pensions tax relief appears to have been abandoned.
However, increases in capital gains tax, inheritance tax, and fuel duty are planned, as well as pension reforms and a potential increase in employer national insurance contributions.
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