Unlock Editor’s Digest for free
Roula Khalaf, FT Editor, picks her favorite stories in this weekly newsletter.
British Prime Minister Sir Keir Starmer has sought to reassure nervous markets that his government will not be addicted to tax and spending after this week’s Budget, as he promised to introduce tough reforms to Britain’s “fractured” state.
Written in the Financial Times After Labour’s first Budget in 14 years sparked a sell-off in the bond market, Starmer tried to dispel fears he would rely on tax rises and more borrowing to fund public services .
“Just as we cannot tax and spend our way to prosperity, we cannot simply spend our way to better public services,” he said. . That is why reform is an essential pillar of this government’s agenda.”
Starmer and Chancellor Rachel Reeves are making a concerted effort to reassure markets, businesses and voters that the £40bn tax hike and £28bn extra annual borrowing in Budget this week not the first of many such increases.
The gold-plated market stabilized on Friday after two days post-budget instability has pushed the government’s long-term borrowing costs to near their highest level since 2008, as investors fear the scale of Reeves’ plans.
Reeves has given himself “room” to borrow tens of billions of pounds more for capital investment and the Institute for Fiscal Studies has warned taxes may have to be increased by another £9 billion to avoid spending cuts in real time. of later ministries in parliament.
Starmer’s paper is an attempt to address such concerns, with allies saying the prime minister and the Treasury will work together to make difficult changes in the way the state works .
“The spending envelope has been fixed,” said an ally of the prime minister. “We have brought stability but now our focus is on reform, reform, reform. Departments will have to reform to improve services.”
In a direct greeting to international investors, Starmer said he would also take on “overreaching regulators and a dysfunctional planning regime” that he said had combined to prevent the country from building houses, factories and green energy programs.
The Prime Minister said the planning reforms were “not ready” to be included in official growth forecasts by the Office for Budget Responsibility, but he insisted they would be implemented and would boost the land’s economic potential water.
“A ‘big build’ can be as transformative for working people as the ‘big bang’ was for the City of London in the 1980s,” he writes.
The market calmed down late in Friday’s trading session, with the 10-year gilt yield at 4.45% – below Thursday’s peak of 4.53% but still well above compared to the low of 4.21% reached in Reeves’ speech on Wednesday. .
Earlier in the day, Moody’s warned that the prime minister’s plan to issue more debt had make it more difficult to fulfill its commitment to repair public finances.
“In our view, increased borrowing, partly supported by a new debt measure in the fiscal framework, will pose an additional challenge to the outlook for consolidation,” the rating agency said. The financial situation is already difficult.”
Mark McCormick, head of FX and EM strategy at TD Securities, said the week’s jump in bond yields was a sign that the market was “rejecting the Budget itself, introducing a financial risk premium”. new to the UK.
He added that the government has “really tried to push ahead” with its spending and borrowing plans.
However, most investors downplay any similarities with the aftermath of Liz Truss’s ill-fated “mini” Budget in 2022, which sent sterling to an all-time low and caused caused a crisis in the gold plating market.
The British pound rose 0.3% against the US dollar on Friday to $1.293, recovering most of Thursday’s losses.
Meanwhile, a BMG Research poll for I newspaper, conducted after the Budget, put the Conservatives ahead of Labor for the first time since 2021, 29 points to 28.
Reeves’ budget has been praised by the IMF and Mario Draghi, the former head of the European Central Bank, Who writes on FT that it contains “some interesting ideas” about how to leverage growth-generating investment.
The former Italian prime minister added: “The UK government has chosen to significantly increase public investment over the next five years and has applied precise rules to ensure that borrowing is only used to finance this investment ”.
