The Budget is less than a day away, and markets are on edge. As I warned yesterday, Reeves is about to take a massive gamble with the nation’s finances. If she gets it wrong, we face a second Liz Truss moment.
This afternoon we edged another step closer.
As well as hiking taxes and making spending cuts tomorrow, Reeves is going to fiddle the fiscal rules to justify borrowing up to £57billion to invest in UK infrastructure.
Britain’s infrastructure desperately needs improving, but this is still a huge gamble.
Global bond market investors are demanding ever higher rates of interest to take on the added risk of buying UK government bonds, known as gilts.
They’re worried our debt will race out of control. Just as they did during Liz Truss’s disastrous 49-day stint at Number 10.
In her calamitous mini-Budget in September 2022, Truss blew a £60billion fiscal hole in the nation’s accounts by throwing a heap of tax cuts at the wealthiest, without working out how to pay for them.
As bond investors panicked interest rates on 10-year gilts rocketed from 3.03% to 4.42% in just over a month. This drove mortgage rates past 6% and Truss was toast.
Now Reeves is set to blow her own £57billion hole, and hope she gets away with it. She’ll be lucky.
Yesterday, I warned that bond yields were creeping ever closer to the Truss tripping point, climbing from 3.77% in mid-September to 4.262%.
And they have continued to climb today.
At 4.45pm they hit 4.326%. That’s just a whisker away from the 4.42% that had Truss deservedly packing her bags.
Today’s spike followed a report in this morning’s Financial Times that UK government debt sales are expected to total almost £298billion for the financial year to March 2025.
That’s the second highest on record. Beaten only by the borrowing splurge during the 2020 pandemic, as the Tory government funded furlough and other emergency schemes during lockdown.
But then we were in the middle of a global pandemic.
The Tories left the finances in an awful mess but today’s bond crisis is down to Labour.
Strategists at Dutch bank ING have warned of “increasing unease” in the gilt market as Reeves plays with the fiscal rules.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, warned Labour’s borrowing boom could “slow the Bank of England’s interest rate cuts”, keeping mortgage rates higher for longer.
Matthew Ryan, head of market strategy at global firm Ebury, said Reeves must convince investors tomorrow that Labour has a credible plan to boost growth, otherwise she risks “triggering a blow-up in the gilt market”.
As the doomsday clock ticks down, there’s a growing risk that Labour’s Budget could blow up in all of our faces.
Tomorrow, I’ll be watching 10-year gilt yields like a hawk. Tick-tock, tick-tock.
