UK Chancellor Rachel Reeves’s second Budget appears to have successfully balanced the competing demands of the bond market and the Parliamentary Labour Party.  

The gilt market strongly telegraphed in recent months which policies it would favour: rising taxes and fiscal prudence. 

So, in the end, we saw tax rises of £26 billion (that somehow don’t break the manifesto promise not to raise tax) and increases to public spending in areas that win political capital without being ruinously expensive (the scrapping of the two-child benefit cap). The increased spending is front loaded, but many tax rises won’t kick in until 2028.

Despite some gyrations from an early leaking of the  Office for Budget Responsibility (OBR) report, the general market reaction during the announcement and in the subsequent hours was positive – gilt yields down, pound sterling up, domestic UK equities up.

Bleak outlook, but enough to move to Dubai?

Dig into the OBR report a little deeper and it still paints a bleak picture of the UK economy over the next few years. The expectations around inflation, productivity and growth are worse than were forecast back in March, but future paths are not sufficiently downgraded as to scare the horses.

One would do well to ignore the small but vocal cohort who claim to be planning to leave the country after every election or Budget. The freezing of tax thresholds is seldom a material factor for those wealthy enough to relocate to Dubai or the other lower-tax destinations often quoted.

Greater fiscal headroom gives the government space to change course, particularly (one would imagine) as the next general election cycle draws closer.
 

Biggest miss: tackling structural issues

The biggest objective criticism one can throw at yesterday’s Budget is the lack of a plan to address the UK’s many structural problems: the continued unsustainability of the state pension ‘triple lock’, the need for reform of spiralling costs of disability benefits and special educational needs provision in schools all remained untouched.

Tackling these is both necessary and likely to be unpopular, and therefore the fact these were avoided this early in a Parliament is in our view a sign of current fragility and lack of confidence by the Labour Party leadership.

And therein lies both the strength and weakness of ‘Starmerism’. During last year’s election campaign he was frequently caricatured using the Roy Jenkins quote that ‘winning an election is like a man carrying a delicate Ming vase across a polished floor’. We can now replace ‘winning an election’ with ‘running a country’, as this Budget was more of the same; sensible, prudent, and pragmatic – but also timid.

However, we are now 14 months into this Labour government and with the reduction in yields seen yesterday, 30-year gilt yields are only 53 basis points (bps) higher than they were at election day. Unlike two days ago, this now compares favourably to a 55 bp increase in 30-year German bunds and a 60 bp lift in 30-year in French government bonds over the same period.

Thus far, for all that she has detractors on both sides of the House of Commons and in the British press, Rachel Reeves has managed to tame the bond market beast pretty well.

All data sourced from Bloomberg unless otherwise stated.

Author: Adam Singleton, Chief Investment Officer External Alpha, at Man Group.


 

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