UK borrowing costs spike after extensive tax cuts announced in budget

Britain’s Chancellor of the Exchequer Rachel Reeves poses with the red budget box outside her office on Downing Street in London, Britain October 30, 2024. 

Maja Smiejkowska | Reuters

LONDON — U.K. borrowing costs on Wednesday touched their highest level since Labour took office, after Finance Minister Rachel Reeves unveiled a vast package of tax hikes in her first budget.

The yield on 10-year U.K. government bonds spiked as much as 7 basis points in the hours following Reeves’ announcements from 12:30 p.m., marking its highest level since she entered the post at the start of July. The yield had cooled to a 3 basis point rise to 4.35% by 4:00 p.m. U.K. time (12:00 p.m. ET).

The yield on 2-year bonds, which in the U.K. are known as gilts, were over 6 basis points higher at 4.33% after rising by as much as 10 basis points.

Yields move in the opposite direction to prices, so a higher yield is generally seen as a sign of greater perceived risk for investors.

The budget contained £40 billion ($52 billion) worth of tax rises to plug a hole in the public finances — with Reeves committing to move toward a day-to-day spending surplus — and to allow for greater investment in public services.

The Treasury separately said it would raise gilt issuance by £22.2 billion ($28.9 billion) to £299.9 billion for the fiscal year to meet its net financing requirement.

The gilt market remained relatively stable compared to past bouts of turbulence in recent years.

Yields soared in September 2022 under former Prime Minister Liz Truss of the Conservative Party, after she announced billions in unfunded tax cuts. The market moves were so severe that they threatened to destabilize U.K. pension funds and required emergency intervention from the Bank of England, forcing Truss to reverse the majority of the changes and resign within weeks.

Analysts had said ahead of the October 2024 budget that such volatility was unlikely to repeat itself for various reasons. Those included the facts that many key policies had already been announced, and that any increase in borrowing would be to fund public investment.

Most importantly, the U.K. has seen inflation drop sharply since the Truss era, with the latest print at 1.7% versus 10.1% during Truss’s premiership.

“We suspect that investors are now likely to be more tolerant of looser fiscal policy given inflation has fallen back to the Bank of England’s 2% inflation target and interest rates are likely to trend downwards,” Joe Maher, assistant economist at Capital Economics, said in a note Monday.

Sanjay Raja, chief U.K. economist at Deutsche Bank Research, said Reeves’ budget “ushered in a marked shift in fiscal policy,” with public services spending to rise by £50 billion by the end of the decade and investment spending to increase by another £20 billion.

“In the end, markets will have to grapple with higher borrowing… For now, markets remain broadly sanguine on the Chancellor’s plans. But today’s budget signals a lot more gilt issuance to come, relative to previous expectations,” Raja said.

“Equally, while the Chancellor hit reset on the fiscal framework today, headroom remains a problem… With public spending pressures only likely to increase from here, the Chancellor will be walking a tight rope between even more tax hikes and/or cuts to spending to ensure she does not fall foul of her newly designed fiscal charter.”

Spread the love

Aniket Pujari

Aniket Pujari is a visionary entrepreneur and dedicated content creator who has made significant contributions to the digital media landscape. As the founder of Minute To Know News, he has established himself as a leading figure in the world of finance, cryptocurrencies, and Internet-related topics.

Related Posts

Amazon launches fixed pricing to treat hair loss, erectile dysfunction

A worker delivers Amazon packages in San Francisco on Oct. 24, 2024. David Paul Morris | Bloomberg | Getty Images Amazon on Thursday announced Prime members can access new fixed…

Spread the love

The Onion wins Alex Jones’ Infowars in bankruptcy auction

The Onion, the satirical news company that repeatedly spoofed conspiracy theorist Alex Jones, has won the bankruptcy auction for control over his media empire — most notably InfoWars, the far-right, conspiracy-minded website…

Spread the love

Leave a Reply

Your email address will not be published. Required fields are marked *

You Missed

India third most improving market in business climate, says IU

India third most improving market in business climate, says IU

Elon Musk becomes ‘First Buddy’, gets ‘uncle’ status in Donald Trump’s family

Elon Musk becomes ‘First Buddy’, gets ‘uncle’ status in Donald Trump’s family

Crypto whales eye PEPE at $2, but experts predict WallitIQ will hit $15 by 2024’s end

Crypto whales eye PEPE at $2, but experts predict WallitIQ will hit $15 by 2024’s end

Reliance Infrastructure Q2 Results: Anil Ambani-led infra major posts net profit of ₹4,082.5 crore on low expenses

Reliance Infrastructure Q2 Results: Anil Ambani-led infra major posts net profit of ₹4,082.5 crore on low expenses

CMIC urges US Congress to legislate crypto

CMIC urges US Congress to legislate crypto

Mark Zuckerberg is now a singer, releases ‘Get Low’ cover for wife Priscilla Chan

Mark Zuckerberg is now a singer, releases ‘Get Low’ cover for wife Priscilla Chan