The biggest story of Budget day happened to be not Rachel Reeves’s speech, but the accidental leak of the official forecast by the Office of Budget Responsibility (OBR). Those who have been clamoring for the abolition of the OBR now have even more ammunition for their campaign.

But while the leak overshadowed her speech, it teed up what was, for the markets, a strong speech. As Reeves rose to address the House of Commons, gilts, the London stock market and the pound all slumped as investors digested the OBR’s figures. But over the course of her hour-long speech, which was confident and combative, markets reversed course, and all finished the afternoon higher: the stock market rallied, the pound strengthened and gilt yields fell.

That being said, bond and currency traders don’t care whether the Budget will make a country’s economy better off. They only care to be repaid in a currency whose value doesn’t depreciate more than the rate of interest they earn, leaving them with a net profit. So, the market reaction was mostly a vote of approval for the measures Reeves took to stabilize the government’s finances.

Reeves improved her fiscal headroom — the gap between revenue and expenditure that can be used for contingencies — to over £20 billion, giving markets a breather. The fiscal deficit is forecast to fall from 4.5% of GDP to 1.9% by 2030-31 and though the debt will still hover at just below 100%, this reflects mainly the damage done by previous governments. And when immediately after the speech the Debt Management Office revealed its plans for gilt issuance over the next year, the fact they came in slightly under forecast was greeted with relief. Investors continue to hold faith in the Chancellor as a steward of the government’s books.

But whether she can retain the faith of her MPs will be the true test. Any sign of restiveness will shake the calm in markets. On which note, Reeves’s self-declared missions to restore economic growth, improve public services and reduce the cost-of-living seem unlikely. The OBR estimates her measures will do little to affect growth and downgraded its forecast for the economy next year.

Similarly, while Reeves announced some measures to reduce prices for households, the OBR reckons that the impact on inflation over the long term will remain muted. Indeed, part of the reason for the improved fiscal turnout is higher tax revenues due to inflation, which most people won’t see as a good thing. Meanwhile the tax burden on middle-class Britons will rise to a record high.

As to public services, it’s not clear how the Chancellor plans to square her plans to cut departmental budgets with her promise to improve public services. For instance, the Home Office faces a real cut to spending that presumes the number of asylum applications will fall, but the OBR also assumes that net migration won’t change. That could be politically tricky for a government that has just announced a restrictive immigration policy. And despite her pledges to reform welfare, there was nary a mention of it in her speech.

Overall, this was a rather humdrum Budget, designed to placate the Labour Left and keep investors onside. But it has done little to excite voters, and still leaves us wondering what this government’s plan for national renewal might be.

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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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