There are several reasons why Labour won the 2024 general election but the most important was the 'mini-Budget'. In the space of a week, Liz Truss and Kwasi Kwarteng dismantled the Conservative Party's reputation, deserved or otherwise, for sound fiscal management. Boris Johnson's complicated relationship with the truth and Rishi Sunak's decision to tack right did not help, but the party's fate was sealed in September 2022.
But the 'mini-Budget' was more than a political calamity for a party. It was a lesson that all Britain's politicians needed to learn once again. That there are limits to how much the nation can borrow. And that if the markets decide a chancellor has overstepped the mark, it will let them know.
Rachel Reeves is yet to deliver her maiden fiscal event, yet she is already under pressure from financial markets. Today,10-year gilt yields, a major benchmark, are running at 4.2 per cent, up from 3.75 per cent in mid-September. A 50 basis point rise in a few weeks is substantial, and represents a stark message to the chancellor. Be careful how much you intend to borrow. The question is, why is this happening now?
First and foremost, it has been widely reported that Reeves is considering relaxing her fiscal rules in order to fund infrastructure projects at the upcoming Budget. On the surface, this is a sensible policy. Cutting back on capital budgets means fewer of the kind of investments that underpin economic growth. But it also means more borrowing.
Then there is tax. Reeves has made great play of the £22 billion blackhole inherited from the previous Conservative government. But she has been inflexible on how to close it. Labour has already ruled out increases to income tax, national insurance and VAT. That is, the three largest revenue raisers. It has also come into difficulty with smaller taxes, such as further tightening the screw on non-doms. So where will the money come from?
To top it off, public borrowing has risen faster than expected, due to higher spending, not least on more generous public sector pay deals. Last month, Britain's public sector net debt hit 100 per cent of GDP for the first time since 1961.
In an upbeat conference speech, Reeves suggested it wastime the Treasury "moved on from just counting the costs of investments, to recognising the benefits too”. She also vowed "no return to austerity". It was music to the ears of both party members and commentators. But the financial markets have delivered a warning: be careful what you wish for.
