October 31, 2024 - 6:30pm
When Rachel Reeves rose to address the House of Commons on Wednesday, yields on the 10-year gilt stood at 4.25%. By Thursday afternoon, some 24 hours later, they were up to 4.5%, while the pound fell.
Obvious parallels to the catastrophic Liz Truss-Kwasi Kwarteng mini-Budget of two years ago immediately came to mind. For the moment, though, it seems unlikely we’ll experience a full-on market crash of the sort that happened then. For one thing, reforms to the pension system which followed that event should staunch the kind of panic-selling which broke out during the Truss premiership.
For another, unlike the 2022 mini-Budget, this Budget doesn’t raise debt on the spurious grounds that tax cuts will supercharge growth — a belief which required a faith in Truss’s genius that investors didn’t share. Reeves has altered the fiscal rules, but has done so in such a way that she will only borrow against assets, ensuring that the extra debt is accounted for in new wealth. Critically, she didn’t sideline the Office of Budget Responsibility, which was called in to mark her maths and show how the figures added up.
In fact, the initial reaction in markets was quite positive. During the course of Reeves’s speech, bond yields actually fell as investors concluded her Budget, while painful in its increased tax burden, was at least sensible and plausible.
Her problems began after she sat back down and the OBR released its assessment. The critical point seemed to come in its conclusion that while her Budget would provide a short-term boost to the economy, its long-term growth impact would be negligible. More bad news came the next day when the respected Institute for Fiscal Studies produced its own assessment of the Budget, and expressed doubts it would work. In particular, the IFS worries that the Chancellor’s maths may not add up after all, and that Reeves will be forced to return to Parliament with more tax rises in the future. The Resolution Foundation joined the pile-on when it issued its own forecast that household incomes would barely budge over the life of this parliament.
As justifiable as tax rises to rebuild public services might be, Reeves appears not to have convinced everyone she has a strategy to relaunch economic growth. She claims that her investments, including in a restored National Health Service, will themselves raise productivity and crowd in private investment. In this, the Chancellor is backed by some economists and the International Monetary Fund. But investors seem unpersuaded, and are thus demanding more generous terms if they are to continue lending to the Government.
Even if a full-on panic is averted, the rise in interest rates, should it continue, will further complicate the Government’s budgeting, and potentially crimp the recovery in the economy as well. There are more measures Reeves can take to support growth which don’t involve spending money, such as tax and planning reforms. However, the most important thing any British government could do is improve upon the trade deal negotiated with Europe after Brexit, whose only remaining defenders today seem to be those who negotiated it.
Yet so far, both Reeves and Prime Minister Keir Starmer have resisted reopening that file, for fear of antagonising Labour’s Brexit supporters. However, if she fails to convince bond markets that she has a plan which will succeed in re-energising the British economy, she may be forced in due course to abandon this timidity. Otherwise, her party may suffer the consequences at the next election.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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Subscribe“Reeves has altered the fiscal rules, but has done so in such a way that she will only borrow against assets, ensuring that the extra debt is accounted for in new wealth.”
In other words, you can borrow $10 bull to build wind turbines and it doesn’t impact borrowing. Hmm.
If the loans are asset backed presumably the borrowers can come and take our rusting windmills in the event of a default. Bring it on.
What has the EU got to do with it? Britain might have its problems but it is doing better than France and Germany. Why would linking our economy more closely to them help anything? I can only assume this Rapley chap is a raving Remoaner.
You missed the point I’m afraid.
Perhaps you’d spell it out for those of us in the cheap seats.
I think you’re right. He makes a beeline for the EU like a well-trained homing pigeon. Lowering the cost of energy would do far more to stimulate growth, but he doesn’t mention that.
Still, there may be trouble ahead. The Bank of England could accelerate quantitative tightening, which would raise interest rates. An incoming Trump administration could carry out Trump’s threat to impose tariffs on the rest of the world. These are two good reasons to think the growth forecasts are a tad optimistic
Folks need to read all the OBR report that was published same day as the Budget. The ‘markets’ have even if most here haven’t. It states ‘Weak growth in imports and exports over the medium term partly reflect the continuing impact of Brexit which we expect to reduce the overall trade intensity of the UK economy by 15 per cent in the long term’. And hence why Author mentions it. That’s a massive hit.
The fact EU Zone has it’s struggles does not mean reducing our own trade was ever a smart move, especially for those keen on Growth.
I have to agree with you here.
The Eurozone’s ‘struggles’ are terminal. We need to shift our focus across the Atlantic. US growth is twice that of Europe and will be 5x when AI is fully unleashed
Can you name three iconic French, German or Italian businesses that are less than fifty years old? No, you can’t. Europe is a rent-seekers’ paradise. We’re much better off out.
Unfortunately the British Isles is not a boat that you can unmoor and drift across the Atlantic HB. A common fallacy of the Brexit brethren. Our biggest trading partners will remain our closest neighbours.
And furthermore did you not see what happened when we tried to get a Free Trade deal with the US? Or with India for that matter?
Now Europe needing some more 21st C dynamism not without some validity. We have some great companies that can export to the huge 480m european population. But in our wisdom we’ve made that harder and more expensive. That’s the point OBR making, painful though it is to hear.
That’s an extraordinarily old-fashioned view of international trade. This is 2024, not 1894.
The problem that both we and, to an even greater extent, the Europeans have, is that the combination of much more advanced technology, lower business taxes and massively cheaper energy in the US (especially if Trump becomes President) is going to suck every last penny of investment out of our economies if we carry on down the path of mollycoddling boomers and the metropolitan class at the expense of the young and productive people. That’s why Reeve’s feeble effort on Wednesday is such an utter disaster. I know you’re a Labour guy, but even you must be starting to wonder about this lot.
Certainly have some doubts and some disappointments but it’s early days. Informative to go back and see how Thatcher was perceived in her first years.
48-49% of our trade done with Europe. Even if that changes a bit making it harder was less than wise.
Trade with Europe has increased since Brexit. Remoaner hysteria has more to do with getting to the house in the Dordogne than it does with trade.
Just read the bit on Brexit written by the OBR. You can twist any which way but a 15% reduction is Billions, and billions in tax revenue too.
The folks who made the difference in the vote for it won’t have the house in the Dordogne and that’s what you should be worried about. They’ve already quietly grasped they were ‘had’.
Maybe if you hadn’t taken all the profits and dumped all the costs on those people they wouldn’t have voted the way they did. Anyway, it’s absurd to go on raking over this for years on end. Europe is failing badly – it would be insane to rejoin.
That’s open to debate. France has far better infrastructure and housing levels. I think what tends to happen is that Brexit boosters (and I support Brexit) tend to seize on every time that Britain fleetingly seems to be doing better on some metric, but the big picture is Britain is a poor performer, in particular in productivity and has been for many decades. I agree that rejoining the EU is not going to just suddenly solve that problem.
But in any case arguing whether or not the Britain is doing better than a particular EU country, is not the same point is whether we might be doing better economically if we haven’t left the EU. Or indeed might still do better if we rejoined or negotiated a “softer” Brexit. Since the economy certainly hasn’t been unleashed by Brexit and that we’re following most of the regulatory pattern of the EU it seems to me that we might as well be much closer aligned to it.
France has more land and fewer people per square KM than the UK. And seems able to ignore bits of EU legislation it dislikes….
France has similar population and yet 8m more homes.
And UK wonders why it has a housing problem? Still enables simpletons to blame migrants instead I guess.
Agree with all of that. We cannot hope to negotiate a better deal from a point of self-inflicted weakness and subservience. We don’t have the political stomach any more for a strong, independent vision – that was the real delusion in all of this.
Slightly O/T – I’m a Leave voter who would support “Fully Join” tomorrow IF it meant dismantling substantial elements of the Whitehall machine iand replacing it with Brussels. Throw the pound and the Treasury into the mix as well.
The pro-EU behaviour of the Civil Service since 2016 tells me that apart from reductions in public sector employment for future generations, we’d barely notice the difference. Even without a Value for Money commissioner. Bin the HoC and just put a professional implementation team in so that EU decisions get done.
No more half-in, half-out for me – it’s actually quite insulting for EU members. We can’t time travel back to pre-June 23rd 2016, and Blair had already started negotiating away the rebate. That process would have continued had we stayed – so where do “Rejoiners” see us going from here in a way that would transform the economy?
Downticks don’t conern me, I am more interested to hear how our politicians believe we can acquiesce our way to a better trade deal. Because we’ve shown far too much weakness to ever get a better deal.
At least be honest with yourselves. The old deal has gone for ever. “Grown ups in the room” doesn’t cut it.
Feel free to Google “Erdogan Tusk Juncker Flood” for tips on how to get the EU’s attention.
That is the only language they understand. It’s the world we now live in.
They are referring to dynamic alignment with agricultural products and the other trade bottlenecks associated with Ireland and the UK minus NI. In other words, they want rid of the UK/EU trade border in the Irish Sea and they want to get rid of lengthy waits at Dover.
Except in return we have to allow more EU fishing in our waters with the intent of making our puffins extinct. As well as sign up to under 30s free movement.
That’s where it all seems to be heading anyway.
The idea that the governmemt can successfully ” invest” is ridiculous. The government spends money inefficiently based on political ideology or cronyism. The government should cut taxes and let individuals and corporations do real investment
I can’t disagree. 30 years of Statism after WW2 left us with British Leyland, British Coal, and Concorde …..
And yet Growth rates were appreciably higher than now. Intriguing.
Any idiot, even Gordon Brown, can create growth by borrowing a few £billion and importing a couple of million cheap workers. Never mind, our kids don’t really need free healthcare or pensions, do they?
SG was referring to a considerably earlier period HB. Concorde means at least early-mid 70s. And Growth rates then higher than now. That’s the point.
Something in the investment culture perhaps that changed?
Yes, for once we agree.
Every business I’ve ever been involved with has had one over-riding ambition: to get government contracts.
Why?
Because people who spend public money don’t care how much of it they waste. Therefore the more spending power governments have, the more rent-seeking there will be and the greater the proportion of spending in the economy that is unproductive. Eventually this failure to invest productively leads to terminal decline. That’s where we and France and Germany are now.
Another five years of artificially inflated property values and phoney expansion driven by unnecessary immigration and borrowing should be just about enough to trigger the final crisis after which, hopefully, we will be forced to confront the real issues.
It also didn’t see utilities cut to the bone while billions was syphoned off to overseas shareholders. Houses were built much more quickly, with a single modest wage enough to buy one. Apprenticeships were plentiful and wages and productivity increased much more quickly than is the case today
Indeed the gordon brownism ‘invest’ is SPENDING. of other people’s money as the government doesn’t have any money; that’s our money.
‘Improve on the trade deal negotiated with Europe after Brexit’? You mean accept terms even less favourable than May’s BRINO?
As desperate supplicants the answer would be : Yes.
Or maybe request to re-join Single Market and Custom Unions and recognise our folly has made us poorer.
Yep, just what we need: more regulation, more overcrowding, falling wages, rising house prices, more inequality, more decline.
The Single Market didn’t make you richer by making the country richer. It made you richer by making other people poorer.
The Civil Service workforce has increased by 100,000 (20%+) since 2019 and the percentage at higher grades has increased.
And yet serious commentators claim that we need to “rebuild public services”?????
We should be cutting public spending, getting serious about public sector efficiency and focusing on support to those in real need not raising taxes.
£4.7b more on Border Force since Brexit and 10k+ more staff, and this nothing to do with stopping boats and just to administer the increased channel import/export and visa checks. Get alot for that if available for other things.
… And all so that you and I can have higher house prices and lower wages as the country gets poorer. Thank God the Labour Party knows better than to take on the freeloaders, eh?
Do you support the increase in checks on goods at our borders and the consequent costs and extra staff employed? Not entirely clear from your comment.
All your arguments are deflections from the real issues, I’m afraid. We are in difficulties economically not because of Brexit, but because we have far too many middle class boomer freeloaders consuming wealth and resources that should be put to more productive use and weak politicians afraid even to contemplate the obvious remedies.
What was missing was an explanation of what the money would be spent on in terms of infrastructure and how that investment would generate growth, extra tax revenues and pay for itself.
Reeves has already shown that she will use the money to increase public sector pay for no productivity increase and investors expect more of the same.
The suggestion that the rise in the number of people on long-term sick pay since 2020 is solely due to these people not being treated by the NHS is a joke to anyone living in the real world.
There’s already a productivity improvement due to cessation of strikes in NHS. That had been 35 planned care working days lost in preceding year (only emergency work covered during strikes). One can debate if the pay resolutions too generous but it’s already regained alot. Nonetheless more to do.
On sickness, 7m on waiting lists with average waits around a year not going to help is it. But I would concur that culturally something happened post pandemic that does need to be addressed too.
Have strikes as a whole actually decreased ?
Seems to me that there are as many strikes as ever. As one group are bought off with a large pay settlement, several others are joining the queue and going on strike to demand equal treatment. You can see it with the railways.
And if you think productivity has actually improved – or will improve – in the public sector, I’ve got a few words for you: the four day week. This is coming – but only for the public sector. If you’ve ever needed evidence that the public sector largely exists for the benefit of its employees and not its users (or customers as we call them in private industry), here it is.
The biggest Public sector pay resolution was with doctors. 35 days of operating on the 7m waiting list going to make quite a difference even if everything else stayed the same – which it can’t and on that I agree.
Think your 4 day wk a bit of echo chamber nonsense. If you think doctors, nurses, teachers, soldiers, policemen and women etc exist just for their own benefit you inhabit a strange world. No doubt some roles have the Weber prediction of self generating bureaucracy but your exaggeration doesn’t help. We need to zero in more on the specific roles where we would possibly concur.
Great question and in many ways the only one that matters given Britain’s dependence on the”kindness of strangers”. Time will tell, but I think the bond vigilantes smell blood. I would put my money on a war of attrition over the coming months culminating in a crisis at some point (either aligned to a wider sovereign debt crisis or the UK as the first domino to fall). With the OBR indicating that the collossal debt/tax expansion is set to deliver negligible growth, she has.already had her knuckles rapped in the context of her objective (fastest G7 growth). Hopefully I am entirely wrong, and whilst i despise the woman’s pokitics and modus operandi, I wish her the best of British for the sake of everyone affected by her decisions.
UK still seen as quite stable when compared to minority Govts in Europe, so as much chance things will settle.
The game changers are more what happens in Middle East, Ukraine and S China sea.
Wait a minute – a few posts ago you were telling us that France and Germany are in better shape than we are.
I’m sure many factors are at play but the author’s comment, “[a]s justifiable as tax rises to rebuild public services might be…” seems to ignore a couple of decades of increasing government spending to little effect.
Neither does there seem to be much notice taken of the growing debt burden (the increase in taxation is lower than the increase in spending.
Finally, while there were problems with the Truss budget, to suggest that cutting taxes could lead to growth was a “spurious” idea ignores the reality that countries who tax less are usually richer.
Only the US, and there are other reasons for that. France and Germany richer and tax more, albeit they are struggling at the mo. Not so simple is it.
A problem is for 14 years we did not invest wisely.
France is bankrupt. Try and keep up.
We haven’t invested wisely for a lot longer than that JW.
I would suggest that it is impossible for the government to invest wisely and that they should stick to a very short list of areas in which there is no chance but to rely on the government
Seriously? Everything’s fine because she is borrowing against assets? Really!?
Using unrealisable assets in this way isn’t a trick at all?
Is there no delusion you Socialists won’t indulge in?
It’s called ‘creative accounting’ – or ‘fraud’ to you and me.
No but certain parts of the media want this to be true for political reasons so they are talking it up.
Tax cuts do increase growth . The writer thinks that pouring scorn on something is a valid argument. Let’s look at recent economic history: Thatcher’s cut to 68% instead of 98% ( you know, Schedules A,B and C, apart from income tax). Ludwig Erhard, who received tearful letters from economists as Thatcher did, before the economic miracle rose out of an occupied land with people living in dustbins. Even Miles today, sees revenue surging in Argentina. Of course Truss planned cuts to spending to accompany her really trivial tax cut. She wanted to clear out the civil service, not protect them from higher taxes. So she had to go. Her policies were utterly unlike Reeves.
All within expected variations. A slightly higher yield, e.g. a few tenths of a % , is as anticipated in Treasury.
Any material growth in the UK will require more imports, hence a widening trade deficit which will in turn devalue our currency and make those imports more expensive. This makes material growth in the UK an expensive business which will raise prices and dampen consumer demand. In other words the multiplier effect is next to zero unless loads of foreign investors invest in manufacturing within freeports in order to add value to material imports.
The question is in what??? which the author fails to elucidate.
Data centres will only produce some jobs with no export value.
Solar power farm output is already being bought up by established corporates like Tesco and Shell so no cheaper energy for households.
Foreign made wind turbine farms will just be jobs with profits leaving the country.
Carbon Capture and CO2 based products needs innovation and commercial viability.
Car batteries are now too efficient so manufacturing would just be a boomlet with domestic lithium reserves only in Cornwall.
Shell have just found a new gas reserve but Labour wants to strangle the UK hydrocarbon industry and import more hydrocarbons from authoritarian dictators.
The only alternative is to concrete over agricultural land and make us even more dependant on fragile global food supply chains in the midst of extreme weather events with housing only further increasing the population who will all need more imports.
No wonder the financial markets aren’t convinced
I hope not but I didn’t expect any sensible commentator to buy the budget.
I hope not but I didn’t expect any neutral commentator to buy the budget.