1st Nov 2024 06:55
(Alliance News) - UK Chancellor Rachel Reeves is seeking to calm the markets and provide reassurance of the nation's stability after her budget borrowing spree sparked jitters.
The budget increased state spending by almost GBP70 billion per year – a little over 2% of gross domestic product – funded by increased taxes and borrowing.
The scale of extra borrowing – around GBP32 billion a year on average – saw yields on government bonds increase as the market responded to the chancellor's plans.
Reeves has played down the impact, saying that "markets will move on any given day" and sought to offer reassurance of her commitment to "economic and fiscal stability".
Paul Johnson, director of the Institute for Fiscal Studies, had warned that the "implausibly low spending increases" in the Budget meant there was a risk taxes would have to rise again if the economic growth Labour is depending on does not materialise.
But the chancellor told Channel 4 she would "absolutely not" come back and raise taxes once again.
She said: "We have now set the envelope of spending for this Parliament, and we're going to live within our means."
Asked if she was worried about the market response, Reeves said: "Markets will move on any given day, but we have now put our public finances on a firm footing with robust fiscal rules."
The International Monetary Fund endorsed the investment and spending on public services in the chancellor's budget, as well as sustainable tax rises.
In an unusual move, the Washington-based watchdog said: "We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue."
But the verdict of the IMF appeared not to reassure financial markets.
The yield – or interest rate – on a 10-year gilt, an indicator for the cost of state borrowing, hit 4.568% on Thursday afternoon, the highest point since August 2023, while the pound also weakened against the dollar.
Reeves was asked if she was worried that the country could be heading for a "Liz Truss situation".
"The number one commitment of this government is economic and fiscal stability which is why we put in place yesterday in the Budget robust fiscal rules that we will meet two years early," she told Bloomberg TV.
"We have more headroom than the previous government left us, and that is important," the chancellor said, insisting that the public finances are "on a stable and a solid trajectory".
Reeves has also acknowledged her decision to raise national insurance contributions for employers could affect wage growth for private sector workers as companies seek to pass on the cost of the tax rise.
The main tax rise in the budget was the GBP25.7 billion change to employers' NICs, although the actual amount of money raised for the exchequer will be around GBP16.1 billion by 2029/30 as firms curb wage rises, cut hours and reduce profits while public sector employers get compensation in their budgets for the change.
Economics experts branded the increase a "tax on working people" which will "definitely" show up in their wages.
The Office for Budget Responsibility forecasts that by 2026-27, some 76% of the total cost of the NICs increase is passed on through lower real wages – a combination of a squeeze on pay rises and increased prices.
The measure could also lead to the equivalent of around 50,000 average-hour jobs being lost, the watchdog said.
James Smith, research director at the Resolution Foundation economic think tank, said: "This is definitely a tax on working people, let's be very clear about that.
"Even if it doesn't show up in pay packets from day one, it will eventually feed through to lower wages."
The OBR has predicted the government's spending measures will provide a temporary boost to GDP.
But the watchdog forecast downgrades in subsequent years, and said the budget measures will add to pressure on inflation and interest rates.
The NHS got a huge boost in the budget.
The tax hikes and increased borrowing allow Reeves to provide a GBP22.6 billion increase in the day-to-day health budget as well as a GBP3.1 billion increase in the capital budget, aimed at buying new equipment and building new hospitals.
She announced that the sugar tax on soft drinks would increase to account for inflation.
The levy could also be expanded, according to a Treasury policy paper.
A review will consider whether to lower the sugar content threshold at which the tax starts applying and potentially creating a third tax rate for drinks with more than, for instance, 10g sugar per 100ml.
It will also look at whether to apply the levy to milk-based and milk substitute drinks, which are currently exempt.
source: PA
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