This was a budget that had to recapture the confidence of the people who lend national governments money.
It doesn’t sound like a priority. Most of us want to hear about the big picture for our taxes but there are thousands of traders who deliver a verdict that can make or break a chancellor. Just ask Kwasi Kwarteng.
Cast your mind back to 2022 and his mini-budget that saw government borrowing costs, and things like mortgages, spike sharply.
That was essentially the result of a bond market revolt against the-then chancellor’s growth plans that gave rise to the so-called bond vigilante. Such people protest loudly when they don’t like what they hear.
The message then was clear and it cost the public purse an estimated £10bn. The full extent of the damage will have been far greater.
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Rachel Reeves was never at risk of causing such a bond market backlash in this budget. After all, we knew all the main policy details in advance and she had clearly stated a key aim of bringing down the UK’s debt costs.
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But given the scale of this tax-raising budget wasn’t in her original plans, she was under intense pressure to convince investors, who she has needed to tap to fund her spending plans to date, that her stewardship of the Treasury was steady.
A series of U-turns on cutting welfare and winter fuel payments, along with stickier than expected inflation, have been reflected in the interest rates – the yield – demanded by investors to hold UK government debt this year.
It meant she had to find more money today to fill the void created by those policy decisions.
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There have been some scary stats and numbers to get to grips with.
Long-term government borrowing costs hit their highest level since 1998 at the end of the summer, leaving the UK with the highest levels facing any G7 nation.
The cost of servicing our national debt over the current financial year is now estimated to total around £114bn – that’s more than 8% of the contents of the chancellor’s purse that can not go on the NHS, defence or education.
So today’s budget was a big deal for a market that has spent weeks, like the rest of us, following every leak and rumour.
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It is the Office for Budget Responsibility’s verdict that really counts.
The watchdog’s findings – accidentally released before the chancellor had even got the chance to open her mouth in parliament – prompted a see-saw for bond yields.
But the good news for the chancellor was that those yields later settled lower – down by a couple of basis points for both long and short-dated bonds.
It’s a cautious welcome.
The bond market would have liked the ‘Reeves freeze’ – the three-year extension of the Tory freeze on income tax thresholds.
Crucially, the OBR declared that the government will have £21.7bn of headroom in five years’ time – up from the £9.9bn sum seen previously and placed in harm’s way by those U-turns on spending cuts.
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The pound rose, by 0.3%, against both the dollar and euro to above $1.32 and €1.14.
The UK stock market rallied too.
Both the FTSE 100 (up by 0.85%) and FTSE 250 (by 1.2%) ended the day higher on the back of a global rally though some sectors outperformed in the wake of the budget.
There was relief in bank stocks, for example, after the industry was spared an extra tax on profits.
Gaming firms suffered – but not all – due to planned hikes in online gambling rates.
Shares in William Hill owner Evoke were almost 17% lower at one stage while those for Entain were leading the gainers on the FTSE 100.
Assuming no further U-turns, the outlook for UK borrowing costs will now depend on how quickly inflation can come down.
A quarter of UK government bonds are tied to the RPI measure of inflation. It is currently running at 4.3%.
It stood at 3.6% when Labour came to office.
Unlike her first budget when the chancellor imposed a £25bn tax on employment, which many businesses passed on, this speech was careful to avoid inflationary consequences down the track.
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It should help lock in an interest rate cut by the Bank of England before Christmas.
Laith Khalaf, head of investment analysis at AJ Bell, said of the bond market reaction: “Early signs are yields are drifting down, but only a touch.
“Given what’s happened at previous budgets that’s actually a pretty good result, so at least one group of stakeholders is happy.
“Breakeven rates were not much changed, which suggests market expectations for inflation have not been hugely shifted by the budget. That may be because falling inflation was already in the price, or perhaps the bond market is still digesting the data.”
Either way, it seems this budget has passed its first big test but Rachel Reeves knows only too well that bond market vigilantes will descend quickly if the OBR’s rosier than expected outlook for the UK economy fails to materialise in these uncertain times, and she fails to change course.
