Source: Sharecast
In a rare speech ahead of the major set-piece fiscal event on November 26, Reeves sought to reassure markets that there would be no major rise in spending but also refused to rule out any tax increases as she faces a spending black hole of up to £30bn.
Reeves said more challenges had emerged since her last that Budget, citing the “continual threat of tariffs” which had hit global confidence “deterring business investment, and dampening growth”, along with persistent inflation, increases in the cost of government borrowing and defence spending.
She added that the commitment to her self-imposed fiscal rules was “ironclad”, warning that there were limits on the price that banks, hedge funds and pension investors were willing to pay for government debt.
Bond yields fell in response, with the rate on UK 10-year bonds down by 4.5 basis points to 4.39%, while the pound dropped to a six-month low of $1.3064,
“The more we try and sell, the more it will cost us. It is important that everyone – the public and politicians - understands that reality. The less we spend on debt interest, the more we can spend on the priorities of working people,” she said.
Reeves said she would not avoid making difficult choices, in yet another sign that the government is prepared to break pledges not to increase income tax, VAT or national insurance. “I could do what previous governments have done, which is to sweep those challenges under the carpet, to cut capital spending, to make the numbers up," she told reporters after the speech.
“But then we’d be back here in a year, in five years’ time, with productivity still on its knees, growth under-performing, national debt continuing to rise. So I’m being honest with people.”
A report by the Resolution Foundation thinktank predicted that Reeves’s “fiscal headroom” of £10bn will have evaporated due to a bleaker economic outlook, and government U-turns on spending cuts.
Britain’s independent Office for Budget Responsibility is also expected to downgrade the UK’s trend productivity growth by 0.3 percentage points, creating an extra £20bn shortfall.
Goldman Sachs analysts said moves by Reeves to tackle Britain’s deficit could push 10-year bond yields down by up to 0.2 percentage points.
AJ Bell head of markets Dan Coatsworth said Reeves’ speech "has left investors with more questions than answers and done nothing to remove uncertainty around taxes”.
“The chancellor said the speech was about giving context to the challenges facing the government, but she batted away questions about taxes faster than an Olympic table tennis player," he said.
“Many people are fed up with this game. There are growing calls for the chancellor to be crystal clear in her plans and make bolder decisions. No-one will be shocked at tax rises and many people believe it is better to sort the situation out once and for all, rather than keep tinkering at the edges. This feels like Reeves’ last chance to fix the house, otherwise her days could be numbered.”
Reporting by Frank Prenesti for Sharecast.com
