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Borrowing rates have risen after Rachel Reeves' Budget, hitting a one-year high in the bond market and prompting tense comparisons with the September mini-Budget two years ago that ended the former prime minister's political career. Minister Liz Truss.
But in comparison, today's movement is minor. Not only that, but news has emerged that may explain some of the bond market's fears.
UK 10-year bond yields are now at 4.48 per cent, compared with about 4.24 per cent just before Reeves presented his budget, an increase of just under a quarter of a percentage point.
Holders of UK government debt sold some of it, driving down bond prices, meaning the amount of interest they generate increases.
The turnaround has been less dramatic than that following the Truss disaster in 2022, said Hal Cook, senior investment analyst at stockbroker Hargreaves Lansdown.
“In what was a big move, the 10-year bond yield went from around 3.3 per cent a couple of days before that mini-Budget to around 4.5 per cent a couple of days after.”
More recently, bond yields had been rising since mid-September, he said. “There are several reasons for this, and the impending Budget has been one of them. “The uncertainty surrounding this specific Budget had made bond investors nervous, with expectations of higher future borrowing in particular weighing on confidence in the attractiveness of UK government debt.”
On top of this, it emerged today that the government's spending watchdog, the Office for Budget Responsibility (OBR), got its calculations wrong about how much leeway Ms Reeves would buy herself when she switched to a new measure of debts. the nation.
A March estimate of £62 billion was an “error”, it said in a footnote first discovered by Bloomberg. The actual figure was £18 billion lower, leaving markets wondering whether this made Reeves' finances too tight.
Apart from the OBR error and the modest nature of the increase in the cost of debt, there are many other differences between this week's budget and Mrs Truss's.
The market went crazy because the former prime minister planned to use debt to pay for tax cuts and hoped they would lead to accelerated growth; The details of his plan were not explained. He also claimed that his plan could be carried out without any cuts in public spending, something with which few economists agreed.
The International Monetary Fund openly criticized Ms Truss's plans, while welcoming this week's budget. Both were considered unusual moves by the UN agency.
In the days following Ms Truss's Budget, she came under increasing pressure to resign. She hoped the fall of her chancellor, Kwasi Kwarteng, would save her, but she resigned a month later after pressure from her parliamentarians.
A week before his resignation, the daily star He asked if it could last longer than lettuce. She couldn't.
Polls at the time showed a lead for the Labor Party of up to 36 points, which would have left the Conservative Party with only 22 seats in parliament.
It also caused the pound to fall, and at one point the pound sterling approached a value of just one dollar.
Rapidly rising borrowing rates disrupted the mortgage market, ruining the home-buying plans of thousands of people and adding billions to borrowing costs.
The turmoil also wiped £425bn off pension valuations in 2022, according to a report this year from the pensions regulator. Some pensions that invested heavily in public debt also opted for low returns. They were forced to sell that debt, causing yields to soar even higher. They eventually recovered thanks to help from the Bank of England.
Ruth Gregory, deputy chief UK economist at Capital Economics, said: “The market fallout from Wednesday's budget is a far cry from the 2022 mini-budget episode. While we cannot completely rule out the possibility of rapid increases in bond yields trigger a cycle of further price declines, we do not believe this is the start of another 'Liz Truss' scenario.”
It has also been widely acknowledged that Ms Reeves was somewhat forced by the disaster she inherited from the last government. The OBR said the previous government had spent an additional £9.5bn earlier in the year that “was not disclosed to the OBR”.
However, higher debt costs will not be good news for the chancellor. On the UK's £2.69 trillion of debt, a quarter percentage point increase in borrowing costs implies an additional interest cost of £6.7 billion a year. In practice, debt costs are fixed when bonds are sold, but if higher yields continue, it will cost the taxpayer more when more debt is issued.
Reeves also downplayed the impact, saying “markets will move any day” and sought to offer assurances of his commitment to “economic and fiscal stability.”
Paul Johnson, director of the Institute for Fiscal Studies (IFS), had warned that the “incredibly low spending increases” in the Budget meant taxes would likely have to rise again if Reeves' growth plan backfired.
But the chancellor told Channel 4 that she would “absolutely not” go back and raise taxes once again.