HAMISH MCRAE: How the Chancellor’s budget failed
Seeing red: Chancellor Rachel Reeves
This was not the intention. Chancellor Rachel Reeves had naturally expected political attacks on her budget and some pushback from the business community. That’s honest stuff.
But apart from the somewhat grudging support from the Office for Budget Responsibility, plus words of encouragement from her conversations with the International Monetary Fund in Washington, she must have expected the markets to believe her story. She would be a responsible custodian of Britain’s finances.
Well, that fear in the gilt market, which saw the 10-year UK government bond yield shoot above 4.5 percent on both Thursday and Friday, was not in the plan.
It always takes a few days for markets to calm down after a major budget change, but a quick assessment is that her budget will add a quarter of a percentage point to UK long-term interest rates at best, and half a percentage point at worst. or a little more.
That means everyone – businesses, mortgage holders and so on – will have to pay a quarter to half a percentage point more for long-term loans than they would have if they had stuck to Jeremy Hunt’s lending plans.
She didn’t see that coming, and I worry about her advisors: smart people who have no understanding or experience of how markets think.
In a situation like this you have to look at what people do, not what they say they will do. This also applies to the response to the rest of the budget.
Take the increase in employer national insurance contributions. We know that companies have to think about what they are going to do. This will differ per sector. But we don’t know what balance they will make between reducing workforces, lowering wages and raising prices. I talked to a company about this and it felt like it would just run its operations with fewer people.
Others will behave differently, but we won’t know for at least six months where the balance will lie. There will be job losses. We have little idea how much.
The same applies to other responses to the budget. The big question – and again, don’t listen to what people say, watch what they do – is how moderately wealthy families will respond to the attack on their wealth.
The truly rich will have already made their plans and it will be a matter of pushing the buttons.
The situation is different for families who are comfortable, but not really rich. This is a big hit. Some may simply see this as a five-year period of waiting for a change of government.
Others will use the changes, especially when it comes to the pension pots coming into their estates, to hand over money to their children and grandchildren sooner than they had planned.
For people in their early careers, the response will vary. Some will decide to accept the overseas post they were considering in Dubai. Some will do nothing and limit their spending where they can.
The danger, expressed among others by the Institute for Fiscal Studies, is that British tax revenues depend on too narrow a base. The top 1 percent of UK taxpayers (those earning more than £214,000 in 2023-2024) pay 29 percent of all income tax. The top 10 percent pays 61 percent of that.
That’s scary. It doesn’t take a major change in the behavior of those top earners to wreak havoc on the country’s tax revenues.
I’m sure the Treasury will have made the calculations about how these people might react, just as they undoubtedly made assumptions about how the markets would react to the higher borrowing plan. But it’s hard to have much confidence in their judgment.
It will take a few weeks for people, both individually and as managers, to know what to do.
The common-sense response was popularized by U.S. President John F. Kennedy: “Don’t get angry, get revenge.” Governments must have revenues. This one has decided that he needs more and that this is the best way to raise him.
Let’s see how the situation will develop in the coming weeks. Let’s see what happens to the gilded market. And let’s use this as an excuse to do the financial planning we probably should be doing anyway.
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