The government has weathered a turbulent first week back, marked by resignations, reshuffles, and market volatility.
These events are poised to shape the contents of the Chancellor’s red box, to be presented outside Number 11 in eleven weeks.
Crucially, it will be Rachel Reeves who holds the briefcase for the second time on November 26th.
Regardless of the circumstances surrounding the deputy prime minister, the stability of Reeves’ position was evident during discussions regarding the Budget date in Birmingham.
Downing Street has taken note of the market’s reaction to the Chancellor’s public displays of emotion, observing that borrowing costs increased when her departure was speculated.
During a visit to a housebuilding site, wielding a hard hat and trowel, her commitment to remaining in post appeared resolute.
“We need you to get qualified and get more flats and houses up,” she told two bricklaying apprentices, while not entirely convincing with her own trowel technique.
She firmly dismissed speculation regarding Budget measures and significant forecast shortfalls, even directing pointed remarks toward the Office for Budget Responsibility, a matter to which we will return.
The Chancellor spent the summer engaging with businesses across the country and taking time off on the Cornish coast.
Simultaneously, global bond markets have exhibited fragility, prompting some economists to suggest a potential £50 billion shortfall, potentially necessitating loans from the International Monetary Fund (IMF).
As politicians resumed their duties, and US traders returned from a national holiday, the 30-year gilt rate—representing the effective interest rate for long-term UK government borrowing—was approaching levels unseen since the early years of Tony Blair and Gordon Brown’s administration.
This development carried significant implications, potentially reversing nearly three decades of relative macroeconomic stability achieved since the Bank of England gained independence.
When questioned, the Chancellor refuted suggestions that fragile bond markets reflected the government’s or her personal credibility, a sentiment previously expressed to previous Chancellors, including Kwasi Kwarteng.
Reeves asserted that bond market fluctuations since the start of the year aligned with global trends, dismissing claims of a UK-specific challenge or IMF involvement as unfounded among “serious economists.”
By week’s end, her optimism proved accurate, with the 30-year yield receding significantly, driven by weaker-than-expected US jobs data.
This mirrored trends in numerous major economies, indicating that this week’s bond market volatility was not a consequence of UK-specific economic or political factors.
On Wednesday, Bank of England Governor Andrew Bailey downplayed the focus on this measure, stating, “It is quite a high number but it is not what is being used for funding at all at the moment actually.”
He clarified that such long-term borrowing constitutes only a small fraction of overall government debt.
Moreover, there was no indication of diminished demand in actual UK debt sales last week, with some measures reaching record levels.
However, it is crucial to acknowledge that these forms of debt do not directly influence, for example, five-year fixed mortgage rates.
While the gilt markets do not currently reflect a UK-specific crisis akin to the mini-budget, they do transmit a cautionary signal.
Fragile global bond markets remain vigilant for any unfavorable economic or political conditions. In this context, the UK’s elevated inflation and any perceived lack of government control following the summer policy reversals could quickly become problematic.
The Chancellor’s team is expected to leverage the bond market volatility to advocate for fiscal discipline, arguing against increased borrowing and for higher taxes or reduced spending to bridge any budgetary gaps.
The extent of these adjustments will depend on market conditions and the OBR’s assessment of long-term economic performance. The Chancellor’s remarks regarding the forecasters adhering to their primary role and refraining from providing a “running commentary on policy” carried some weight.
The OBR’s evaluation of UK productivity could significantly influence the size of any budgetary shortfall and, consequently, the extent of austerity measures required.
Expect negotiations with the Downing Street economic team, who will insist that the OBR’s forecast reflect their reforms, particularly in planning. The initial independent assessment is anticipated by the end of the month, coinciding with her conference speech in Liverpool.
Subsequently, the Treasury’s “scorecard” will be populated with a list of potential revenue-raising measures, fueling speculation. Ministers have expressed surprise at some of the rumors circulating. For instance, bank shares declined following suggestions that the Chancellor would implement a think tank report on windfall taxes, published during her vacation, which she has not even reviewed.
Departmental budgets were established during the Spending Review, and there are no plans to revisit that process, implying that any restraint will necessitate adjustments to the broader Welfare Bill.
The Chancellor did not explicitly rule this out but emphasized the need for “more to do” on reforms aimed at facilitating workforce re-entry. The new cabinet, without the former deputy PM, author of a leaked letter on wealth taxes, might be more amenable.
Overall, this represents an opportunity for the Chancellor to initiate long-term, pro-growth reforms to the tax system, which she intends to pursue.
However, OBR spreadsheets, market volatility, and backbench opposition to cuts will ultimately dictate the magnitude of additional tax demands presented in the red box on November 26th.
Much can change between now and then.
Sales volumes rose by a stronger-than-expected 0.6% in July, official statistics show.
Government bond yields fall after hitting highest level since 1998 earlier in the week.
The chancellor hits back at speculation over tax rises, but will need to find the money from somewhere.
The chancellor hit back at the idea that the government faces so large a gap between spending and tax income.
The chancellor will set out her plans for the UK economy in November with speculation growing over tax rises.