One Budget is bad enough. The Chancellor may be forced to give us two
Rachel Reeves could be forced to do a second Budget if the first one is really bad (Image: Getty)
Rachel Reeves has dug herself into a deep hole, and there’s no way out. Her Budget is just a week away and she still doesn’t seem to know what’s in it. After her U-turn on income tax, we’re now braced for a “smorgasbord” of smaller tax rises that could do even more damage to an economy crying out for stability.
Her mismanagement has driven up inflation, destroyed jobs, killed growth and forced up borrowing costs. Ten-year gilt yields are climbing again, lifting the cost of servicing our already swollen debts. Britain is paying what traders bluntly call a “moron premium” as global investors demand more interest to lend us money, because they think we’re run by, well, morons.
Reeves has to get every line of this Budget right on November 26, yet her track record suggests she’ll get it all wrong. And if she does, the bond market could force her back to the despatch box for a second go.
That’s the nightmare scenario set out by a senior City investor who, like most of us, can’t see how she pulls this off.
The warning comes from bond market manager David Zahn at Franklin Templeton. He fears the Budget could backfire with gilt yields spiking as the damage becomes clear. Should that happen, the all-powerful bond market may force the Chancellor to write a “secondary budget” to reverse the damage. If the market throws a tantrum, she may have no choice but to do it all over again in December. Oh joy.
Zahn says yields on 10-year and 30-year gilts heading towards 6% would be “unsustainable”, risking a “death spiral” of soaring borrowing costs. So that’s the number to watch. Today, yields stand at just over 4.55% and 5.38%. We’re not there yet, but we’re uncomfortably close.
Reeves won’t push through spending cuts and won’t touch the big taxes either, because Labour back benchers will rebel. This leaves her with no credible plan to impress investors. As Zahn put it, unless she cuts spending and delivers “real tax increases”, the markets won’t believe she’s fixing Britain’s finances, and may panic as a result.
Estimates suggest she faces a £30billion hole in the Budget. She also needs to rebuild fiscal headroom, ideally to “north of £20billion”, to protect against future shocks. That’s an awful lot of money. Even if she survives this year, Zahn fears another nightmare in 2026 as she comes back for yet more tax because her sums still won’t add up.
We’ll find out soon enough whether Zahn is proved right. It would be the ultimate humiliation for Reeves, but it can’t be ruled out.
None of us will forget the meltdown in September 2022, when Liz Truss and Kwasi Kwarteng triggered a bond market revolt with their unfunded tax cuts. Gilt yields shot up, the pound plunged and mortgage rates surged. Truss was gone after just 49 days.
Britain is now in an even more precarious position. Borrowing is huge. Spending is out of control. Yet the moment ministers hint at cuts, their own MPs erupt. The party’s army of economic illiterates would rather moan about being “in hock to the bond market” than face up to the real problem.
Reeves must now take her chances with the traders who hold the nation’s credit score in their hands. So will the rest of us. If Reeves is forced to deliver a second Budget before the ink dries on the first, it’ll be game over for her, and possibly for Keir Starmer too.
