First of all, don’t panic.
What you need to know is this. The budget has not fared well on the financial markets. It’s fallen about as much as any budget in recent years, barring Liz Truss’s mini-budget.
The pound is weaker. Treasury yields (essentially the interest the Treasury pays on its debt) have risen. That is exactly the opposite reaction from the market that the chancellors would like to see after recommending their budget statements to the House of Representatives.
This all started to crystallize shortly after the Budget speech, when interest rates started to rise and the pound started to weaken, just as investors and economists got their hands on the Budget documentation. But the fall in the pound and the rise in bond yields have accelerated today.
To be clear, this is not the kind of response a chancellor wants to see after a budget, let alone his first budget in office. Indeed, I cannot recall any other Budget in many years that has seen as hostile a market reaction as this one, bar one.
That exception, of course, is the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here you’ll find the silver lining for Sir Keir Starmer and Rachel Reeves.
The rises in government bond yields and falls in sterling in recent hours and days are still a far cry from what occurred in the run-up to and aftermath of the mini-budget. This does not yet feel like a crisis moment for the British markets.
But it’s not like good news for the government either. It’s actually pretty awful. Because higher interest rates on UK debt mean that the country (well, we) will end up having to pay significantly more to service our debts in the coming years. And that debt is about to rise dramatically because of the plans laid out by the Chancellor this week.
And this is where things get particularly tricky for Ms. Reeves. In that budget documentation, the Office for Budget Responsibility said the Chancellor could afford to see those government bonds rise by around 1.3 percentage points, but if they exceeded this level the so-called ‘headroom’ she had against her budget rules evaporate. . In other words, she would be breaking those rules – which, consider again, are considerably less strict than the rules she inherited from Jeremy Hunt.
That begs the question: where are those government bonds right now? How close are they to the danger zone where the Chancellor finally breaks her rules?
Short answer: worryingly close. Because right now the yield on five-year government bonds (which is the maturity the OBR is most focused on) is more than halfway towards that danger zone – just 56 basis points away from the point where interest costs eat up the headroom the Chancellor is giving has to keep her from breaking her rules.
We are not yet in a crisis area. Also, not every movement in currencies and bonds can be attributed to this budget. The markets are volatile at the moment. There’s a lot going on: US elections next week and a decision by the Bank of England on interest rates next week.
The chancellor may be lucky. Government bond yields could fall in the coming days. But right now Britain, with its high public and private debts, and its new government having just promised to borrow many billions more in the coming years, is being closely watched by the ‘bond vigilantes’.
A Halloween nightmare for every chancellor.