Chancellor Rachel Reeves has moved swiftly to allay concerns in the markets and assure the UK’s financial stability following her recent Budget that involved significant borrowing. The Budget included a substantial increase in state spending of almost £70 billion annually, equivalent to just over 2% of the GDP, which was to be funded through higher taxes and borrowing. This surge in borrowing, averaging around £32 billion per year, caused government bond yields to rise as investors reacted to the Chancellor’s fiscal plans.
Despite the market reaction, Chancellor Reeves sought to downplay worries, stating that “markets will move on any given day” and emphasising her commitment to maintaining economic and fiscal stability. Paul Johnson, director of the Institute for Fiscal Studies (IFS), raised concerns about the Budget’s potentially low spending increases, suggesting that if the expected economic growth did not materialise, further tax hikes might be necessary. However, Chancellor Reeves firmly stated in an interview with Channel 4 that there would be no additional tax rises, asserting that the government had established the spending framework for this Parliament and was determined to live within its means.
Addressing concerns about market reactions, Chancellor Reeves reiterated that the government had put the public finances on a solid foundation with robust fiscal rules. The International Monetary Fund (IMF) supported the investment and public service spending outlined in the Budget, along with the sustainable tax increases proposed. Despite the IMF’s approval, financial markets remained unsettled, with the 10-year gilt yield reaching its highest level since August 2023, and the pound weakening against the dollar.
In a surprising move, the Washington-based watchdog endorsed the government’s reduction of the deficit over the medium term by raising revenue sustainably. The Chancellor also addressed the decision to increase national insurance contributions (NICs) for employers, acknowledging the potential impact on wage growth for private sector workers as businesses adjust to the tax hike. The main tax increase in the Budget was the adjustment to employers’ NICs, estimated to raise around £16.1 billion by 2029/30, as companies might reduce wage increases, cut hours, and lower profits to compensate, while public sector employers would receive budgetary compensation for the change.
The Office for Budget Responsibility (OBR) projected that by the financial year 2026-27, up to 76% of the cumulative cost of the NICs hike could translate into reduced real wages, leading to potential job losses averaging around 50,000 per hour. The OBR also forecasted a temporary GDP increase due to government spending initiatives but downgraded its forecasts for the coming years, cautioning that these budget measures could exacerbate inflation and interest rates. The NHS received significant financial support, with a notable increase in operational costs and funding for new equipment and hospital construction. Additionally, the sugar tax on soft drinks is set to rise in line with inflation, and further policy considerations may broaden its application to include milk-based drinks and lower sugar content thresholds.
In summary, Chancellor Rachel Reeves has faced market uncertainties following the Budget borrowing spree, but remains resolute in her commitment to economic stability and prudent fiscal management. While the government’s Budget initiatives have received support from international organizations like the IMF, the implications on market reactions and wage growth remain key areas of scrutiny and concern moving forward.