Rachel Reeves is facing a Budget headache as government borrowing costs soar and business confidence sinks amid anxiety over sky-high debt and rising taxes.
In a sign of concern among global investors about the Chancellor’s plans, gilt yields have climbed sharply in recent days and yesterday hit the highest level since Labour came to power.
Reeves was warned she is walking a ‘tightrope’ as she seeks to fulfil her spending pledges while also avoiding a repeat of the rout on the bond markets seen after the Liz Truss mini-Budget two years ago.
Balancing act: Rachel Reeves (pictured) was warned she is walking a ‘tightrope’ as she seeks to fulfil her spending pledges while also avoiding a repeat of the rout on the bond markets
‘Investors fear Labour will fund increased investment with higher debt,’ said Elias Haddad, a senior markets strategist at private investment bank Brown Brothers Harriman.
Borrowing costs have also been pushed higher by suggestions the Bank of England will cut interest rates only slowly.
At the same time, confidence is ebbing away as businesses brace for a series of tax hikes that could hammer investment and cost jobs.
A survey by the Institute of Chartered Accountants in England and Wales (ICAEW) is the latest to show the impact Labour’s doom and gloom is having on the economy.
The group’s business confidence monitor – a quarterly survey of corporate sentiment – fell in the three months after the general election for the first time in a year.
ICAEW economics director Suren Thiru said ‘fears of a painful Budget’ on October 30 have ‘dented business confidence’.
Similar warnings have come from the British Chambers of Commerce, Confederation of British Industry and Institute of Directors.
Reeves has been criticised for talking the economy down, claiming Labour has inherited the ‘worst set of circumstances since the Second World War’ and identifying an apparent £22billion black hole in the public finances.
The Chancellor is struggling to raise the taxes required to fill the hole and fund her spending plans. It is thought she could relax her borrowing and debt rules to create the room needed to increase investment.
But the risks associated with such a move have been highlighted on the bond markets, with the ten-year gilt yield hitting 4.22 per cent yesterday, the highest level since the election.
They were hovering around 3.75 per cent in mid-September.
The 30-year gilt yield – another key measure of how much it costs the Government to borrow on international markets – also topped 4.75 per cent yesterday for the first time since Labour came to power.
Neil Wilson, chief markets analyst at broker Finalto, said: ‘Labour may well want to change the debt rule to allow for more borrowing for investment. The bond market may not let them. The memory of the Truss panic is still vivid.’
Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said: ‘Reeves needs to walk a tightrope, otherwise the gilt market will limit her ability to deliver much of Labour’s agenda.’
Reeves has already watered down proposals to raise extra cash from non-doms and private equity staff while a planned raid on pensions tax relief also looks to have been abandoned.
But hikes to capital gains tax, inheritance tax and fuel duty are on the cards along with pension reforms and a possible increase in employer national insurance contributions.
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