Chancellor Rachel Reeves is facing calls to raise an additional £9bn in taxes to avoid implementing austerity measures in key public services. This comes after her record-breaking tax-raising budget sent shockwaves through financial markets, causing government borrowing costs to soar.
Financial Market Jitters
Despite Reeves’s attempts to restore economic stability, traders reacted negatively to her tax and spending measures. The yield on 10-year government bonds, which represents the interest rate the government must pay to borrow money, jumped to its highest level this year, surpassing 4.5%. This surge in borrowing costs threatens to undermine the chancellor’s budget plans and has drawn comparisons to the market turmoil following Liz Truss’s mini-budget.
While the fallout from Reeves’s budget is less severe than the “mini-budget debacle” of 2022, it has nonetheless raised concerns among investors about the UK’s fiscal outlook. As one economist noted:
A meltdown of similar proportions remains unlikely, but plainly investors are nervous about the fiscal outlook in the UK (and elsewhere).
– Jonas Goltermann, Capital Economics
Mounting Pressure
The negative market reaction has put Reeves under increased scrutiny, with her opposition counterpart, Jeremy Hunt, accusing her of preaching stability without practicing it. Hunt argued that the extra borrowing would lead to more expensive mortgages and higher debt interest payments for taxpayers.
Despite these criticisms, Reeves remains committed to her budget plans, insisting that Labour’s “number one commitment” is to economic and fiscal stability. In an interview with Bloomberg, she stated:
We have now put our public finances on a stable and a solid trajectory.
– Rachel Reeves, Chancellor of the Exchequer
Calls for Additional Funding
Leading economists have questioned whether Reeves’s £70bn package of additional spending measures will be sufficient to reboot growth while stabilizing government finances. The Institute for Fiscal Studies (IFS) has warned that the chancellor may need to raise an extra £9bn to avoid implementing real-terms cuts to unprotected Whitehall departments, such as councils, the justice system, and prisons.
Paul Johnson, director of the IFS, cast doubt on Labour’s claim to be turning the page on austerity, suggesting that Reeves’s spending plans amounted to “pretending” that the government would splurge in the early years before reining in spending later. He argued:
That’s not going to happen. The spending plans will not survive contact with her cabinet colleagues.
– Paul Johnson, Institute for Fiscal Studies
Stagnation Nation Concerns
Despite the chancellor’s efforts to increase spending, raise taxes, and borrow more, experts have questioned whether her budget goes far enough to improve public services and raise living standards in a meaningful way before the next election. The Resolution Foundation, a leading think tank, warned that the budget had not yet delivered a “decisive shift away from Britain’s record as a ‘stagnation nation'”.
Mike Brewer, the foundation’s interim chief executive, highlighted the short-term benefits of better-funded public services but cautioned that families would face a further squeeze on living standards due to the rise in employer national insurance contributions, which is expected to dampen wage growth.
Government Response
In response to the criticism, a spokesperson for Prime Minister Starmer defended the budget, stating that it represented a significant increase in public spending compared to the plans inherited from the previous government. They emphasized that the chancellor had to make difficult decisions to fix the foundations and put more money into public services.
The spokesperson also hinted that the government hoped growth forecasts would improve over the course of the parliament once further policies, such as planning reforms, had been announced and could be assessed by the Office for Budget Responsibility (OBR).
This is not the limit of her ambitions when it comes to growth. The OBR figures don’t take into account a significant range of other reforms that the government’s undertaking, whether it’s planning reform, reforms of the skills system … this is not the limit of our agenda on growth.
– Spokesperson for Prime Minister Starmer
Looking Ahead
As the dust settles on Rachel Reeves’s first budget as chancellor, the focus will now turn to whether she can navigate the challenges posed by the negative market reaction and calls for additional funding. With the Bank of England and the Treasury closely monitoring the situation, the government will need to strike a delicate balance between fiscal responsibility and delivering on its promises to the electorate.
The coming weeks and months will be crucial in determining whether Reeves can steady the ship and set the UK on a path towards sustainable growth and prosperity. As one commentator put it:
Rachel Reeves’s budget has survived its first contact with reality, but the real test is yet to come.
– Anonymous political analyst
Only time will tell if the chancellor’s bold tax and spending plans will deliver the stability and growth the UK so desperately needs, or if further adjustments will be necessary to keep the economy on track.
