How Worried Should We Be About The Way The Markets Are Reacting To The Budget?

The cost of government borrowing has gone up and the value of the pound has fallen as the money markets react to the Budget delivered by Rachel Reeves on Wednesday.

That has sparked some fears that the UK is heading for a Liz Truss-style economic meltdown triggered by the chancellor’s decision to massively increase taxes and government borrowing.

On Thursday afternoon, bond yields – effectively the interest rate the government pays on its debt – hit 4.568%, the highest it has been since August last year.

That is significant because the more money the government has to pay servicing debt, the less there is available to spend on public services.

Sky News economics editor Ed Conway said voters should be “certainly a bit worried” by what is happening on the money markets.

Posting on X, he said: “There has been a marked rise in UK bond yields following the Budget which is greater than what we’re seeing in other markets.”

But he added: “Perhaps the most important thing to say is: this is NOTHING like the reaction we saw following the Truss mini Budget.

“Even so, there has definitely been SOME reaction. The pound weakened a bit and gilt yields rose. This despite the fact that most of this Budget was pre-briefed long in advance. Investors are actively re-pricing UK debt. And that matters.

“The issue at present isn’t the one Liz Truss had to grapple with – a near financial crisis – but something else. The cost of debt servicing is going up. And if debt interest costs goes up it has a direct bearing on the government’s fiscal plans.”

At the same time, the value of the pound against the dollar has also fallen – further evoking memories of the financial crisis which followed Truss’ disastrous mini-Budget two years ago.

Kathleen Brooks, an analyst at trading firm XTB, said the the Budget “has not been well received” by the markets.

Kyle Chapman, an analyst at trading firm Ballinger Group, said the fall in the pound and rise in gilt yields indicated that the market had decided Labour had “overextended” with its borrowing and spending plans.

However, other analysts insisted the current situation was completely different to when Kwasi Kwarteng, Truss’ chancellor, announced £45bn of unfunded tax cuts.

“Investors feared a new Liz Truss moment, but in the end the announcements do not suggest an uncontrolled surge in debt,” Edmond de Rothschild Asset Management portfolio manager, Nabil Milali, said.

Laith Khalaf, head of investment analysis at AJ Bell, said: “Of course, markets are especially sensitive to the effect chancellors can have on interest rates ever since Kwasi Kwarteng took to the despatch box, and with the ten-year gilt yield now climbing to levels seen in the wake of mini-Budget, it’s fair to ask whether Rachel Reeves’ maiden Budget could cause similar problems.

“The answer is probably, and hopefully, not.”