Labour versus the bond markets, businesses and ballots
Birthdays aren’t best celebrated on a hangover but Labour’s senior leaders will be waking up with a painful headache this morning after haemorrhaging support from both bond markets and backbenchers.
As dozens of Labour MPs discovered the level of influence they held over whips in parliament, unsympathetic bond traders flexed their own powers as medium-term gilt yields rose by 20 basis points when Starmer declined to comment on questions about whether Rachel Reeves’ would remain Chancellor.
The upturn in gilt yields, which raises the cost of borrowing for the government, was linked to fears Reeves was about to be replaced with a Chancellor who would take a “looser approach” to borrowing, as AJ Bell’s Danni Hewson noted.
Soaring gilt yields since the Liz Truss have otherwise reflected bond markets’ confidence in the state of public finances.
The government believed growth could help it keep backbenchers happy, voters on their side and bond markets less anxious. Reeves went on the record to say Labour would be the “most pro-business government” the country had ever seen. But that pledge now appears in tatters along with the promise not to put taxes up on working people.
Businesses justifiably fear that they will have to stump up yet more cash to fund the government’s policies, having paid more in corporation tax, employer NICs and business rates over the last three tax years.
A small fiscal headroom worth £9.9bn left in March means U-turns on welfare savings will come back to haunt the Chancellor come the autumn. City analysts at Jefferies warned as soon as two hours after the Spring Statement that the Chancellor would have to raise taxes in the autumn. Capital Economics believes the tax-raising exercise later this year will draw out nearly £25bn for government expenditure.
Labour’s spending policies
This is in part to fund spending commitments which were set in stone earlier this year.
After a spate of pay increases for public sector workers and extra cash towards healthcare, Labour has doubled down on increasing day-to-day spending on government departments.
Key to long-term growth plans and boosting productivity is extra investment in infrastructure, defined by higher capital spending over the next five years.
Everything the Treasury decides hinges on how the Office for Budget Responsibility (OBR), the fiscal watchdog, scores recent growth policies, including on trade deals, pension reforms, bail-outs for ailing businesses and backing the British Business Bank.
In March, the OBR halved its growth forecast from two per cent to one per cent for this year, a damning indictment of the effects of Reeves’ last Autumn Budget.
Dwindling support
As it comes to put together its next fiscal report by October, it will be closely evaluating whether the hike in taxes had a worse effect than it expected after the number of payrolled employees has dropped since last autumn.
A downward revision to growth figures, which analysts fear is more likely to happen after the OBR published a note on Tuesday stating it was prone to overestimating figures in the medium-term, would erode Rachel Reeves’ headroom.
The Chancellor’s own decisions partly depend on the results of President Trump’s economic experiments, the safety of global trade routes at a time of conflict, and the bounciness of markets in Japan and Germany.
But voters don’t want to hear any of it. To them, one government minister is to blame for the UK’s economic woes and that is Reeves, the least popular of the main Cabinet officials.
From the prime minister to the electorate, of all the groups with a vested interest in what the Chancellor decides next, bond traders appear to be the ones that have Reeves’s back. For now.
But come the autumn, should her “iron-clad” fiscal rules prove rather flimsy, she may find herself alone – unpopular, unsuccessful and out of road.