Market jitters after first Labour budget

November 5, 2024 –
From Socialist Worker (UK)

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Chancellor Rachel Reeves (Photo: Flickr/ HM Treasury)

One really has to hand it to the two dominant figures in the Labour Party—prime minister Keir Starmer and chancellor Rachel Reeves. They’ve come close to winning the Liz Truss prize for wrecking their own government in record time.

On the one hand, by taking away winter fuel payments from millions of pensioners and accepting handouts from Lord Alli, they’ve managed to alienate many of those who voted for them in July.

In the latest poll from BMG research, Labour is one percentage point behind an electorally-shattered Conservative Party. This is a nice present for Kemi Badenoch, the right wing demagogue who’s just won the Tory leadership.

On the other hand, there is the debacle of Reeves’s much touted first budget last Wednesday. She continually repeats her pledge to achieve “economic and political stability”.

But despite all her efforts to appease the financial markets, investors sold off gilts—British government bonds—in the days after the budget. This pushed up the interest the Treasury has to pay on its borrowing.

The next day the Financial Times newspaper reported, “The rise in yields takes UK 10-year borrowing costs closer to the 4.63 percent peak hit in the wake of Liz Truss’s September 2022 ‘mini’ Budget, which sparked a crisis in the gilt market and caused the pound to crash to a record low.”

Starmer had to rush to publish an article in the same paper “to reassure nervous markets that his government will not become addicted to tax and spend after this week’s Budget, as he promised to carry out tough reforms to Britain’s ‘creaking’ state”.

The problem with the budget is that it fell between two stools. Increasing investment and improving services means higher public spending. Reeves sought to do this in a “fiscally responsible” way by tweaking her own fiscal rules to allow her to borrow more and raising taxes in a way that wouldn’t spook the markets by hitting wealth and profits too hard.

But she did enough to send bosses, farmers and the Tory press squealing about “socialism”, a return to the 1970s and other such nonsense. She lifted employers’ national insurance contributions and increasing inheritance tax on pensions and agricultural land.

At the same time, while Reeves aims to increase public spending by £70 billion over five years, this is concentrated on health and schools. It’s also heavily “front-loaded”. Day-to-day spending will rise by 3.1 percent in 2025-26 and drop sharply to 1.3 percent a year in real terms in subsequent years.

According to an article on the Bloomberg website, “Departments with unprotected budgets, such as transport or justice, are heading for real-terms cuts later in the parliament… That is tantamount to austerity, one party official said privately.”

A protest outside of Labour Party Conference a month before the budget increases minium wage

Breadline Britain: voices from minimum wage workers

The article reports “jitters in Labour’s cabinet”. “Having been elected on a ‘change’ platform and prime minister Keir Starmer’s promise of a decade of national renewal, some Labour politicians wondered about winning a second term,” it says.

The market reaction was probably in part a response to the austerity in Reeves’s fine print. Many suspect that, to head off a spending squeeze near the next election, the government will eventually have to tax and borrow even more. As it is, government borrowing is now projected to be £142 billion more in the next five years than previously expected.

Markets work by supply and demand. If governments seek to borrow more, it’s logical that the cost of this borrowing should go up. The irony is that higher interest payments will further increase the burden on the state.

Starmer and Reeves have tried to square the circle—to offer working people better public services and to keep the financial markets happy. Their wretched performance isn’t just a consequence of their ineptitude. It arises from the incompatibility of these objectives.

When they have to choose between them, it takes no genius to predict they will opt to appease the markets. Already the government is talking up forcing through yet more NHS “reforms” and cuts to welfare benefits. No wonder the Tories are so cheerful.

Source: Socialistworker.co.uk