Getty ImagesChancellor Rachel Reeves always knew she would spend many days explaining her budget.
Reaction from those who paid for it Tax increases near record It’s always going to be harsh. For the chancellor, her current political pain is a price worth paying.
The Budget is a long-term play on the economy. In reference to Reeves’ favorite pastime, this isn’t speed chess.
The Chancellor’s most helpful asset as she seeks to restart the UK economic model is that she has the overwhelming majority to credibly pass all these policies into law.
This is one of the many differences with Liz Truss’ mini-budget that is sometimes underestimated. During the 2022 Budget, markets will not only test the economic credibility of the Prime Minister and Chancellor of the Exchequer, but also their political credibility in trying to get a radically different set of economic policies through the House of Commons.
Look at France now, where the country is trying to rein in government borrowing levels, but a minority government of the third largest party is trying to pass tough measures.
Markets have less confidence in a minority government than in a majority government like the UK.
credibility
Two key assets of the new Prime Minister (Kwasi Kwateng was not elected) were political credibility to pass the budget and financial credibility in the market.
In the crucial government bond market, which not only rules on the budget but also affects interest rates on mortgages and business loans, it’s fair to say the mood is more than just raised eyebrows right now.
Although there was no response at the time of the budget, the announcement of plans to increase government bond sales has already attracted attention. Cause interest rates to rise significantly. That’s because the government borrowed more than the market expected. The reaction now is noteworthy, but still in order.
This is partly a repricing of increased demand for UK government loans, as well as expectations that the Bank of England, facing greater post-budget inflationary pressures, will not cut rates as quickly.
As previously expected, interest rates may not fall below 4% next year. Follow-up comments from the Bank of England will be closely watched next week when it releases new inflation forecasts.
Mammoth changes
The reaction was muted given the dramatic changes in Wednesday’s Budget, which will see £76bn of new annual spending, half from tax and half from borrowing.
Aides to the chancellor said the key fact was that the borrowing was mainly used for the UK’s large-scale long-term investment in major capital projects.
The plan adds £105 billion to investment compared with previous Conservative plans to slash investment, keeping borrowing at the highest sustained level for half a century.
This is likely to be much better for long-term economic growth without causing inflation. Obviously, it depends on where the money is spent.
The sums are significant and hint at Joe Biden’s plans in the United States to invest billions in government money into the economy.
Energy Secretary Ed Miliband was in the United States last week to visit key officials responsible for disbursing record subsidies and loans included in the $400 billion inflation-cutting bill. One lesson for the United States is that building good channels for government investment takes time.
While the U.S. private sector took an immediate cue from the government’s massive announcements, it took a year or two for the state machinery to kick into gear.
The full size of Wednesday’s UK budget proposals can be seen as a bet on the new government’s ability and judgment to launch high-productivity investments that will deliver the growth that is lacking in forecasts.
Of course, Biden’s US strategy may not last a week if Donald Trump returns to the White House.
But unlike Prime Minister Joe Biden, his chancellor and energy secretary has at least four years to work toward that goal.
Long-term economic factors are why they are taking the political hit now.
