HAMISH MCRAE: How Chancellor’s Budget backfired

Seeing red: Chancellor Rachel Reeves

This wasn’t meant to happen. Chancellor Rachel Reeves would of course have expected political attacks for her Budget and some corporate push-back. That’s fair stuff.

But having onside the slightly grudging support of the Office for Budget Responsibility, plus words of encouragement from her conversations with the International Monetary Fund in Washington, she must have expected the markets to buy her story. She would be a responsible custodian of the finances of the UK.

Well that gilt market angst, with the ten-year yield on UK Government bonds shooting above 4.5 per cent on both Thursday and Friday, were not in the plan.

Markets always take a few days to settle down after a big fiscal shift of policy, but a quick judgment is that her Budget will at best add a quarter of a percentage point to long-term UK interest rates, and at worst half a percentage point or a bit more. 

That means everyone – companies, mortgage-holders and so on – will have to pay a quarter or a half percentage point more for long-term loans than they would have done had she stuck to the borrowing plans of Jeremy Hunt.

She did not see that one coming, and it makes me worry about her advisers: clever people who have zero understanding or experience of how markets think.

In a situation such as this you have to look at what people do, not what they say they will do. This applies to the response to the rest of the Budget.

Take the increase in employer National Insurance Contributions. We know businesses have to figure out what they will do. That will vary from sector to sector. But we don’t know the balance they will make between cutting staff numbers, trimming wages, and putting up prices. I spoke with one company about this and it felt it would simply run its business with fewer people.

Others will act differently, but we won’t know for at least six months where the balance will be. There will be job losses. We have little idea how many.

The same goes for other reactions to the Budget. The huge question – and again, don’t listen to what people say, look at what they do – is how moderately well-off families will respond to the attack on their wealth.

The truly rich will already have made their plans and it will be a question of pressing the buttons.

For families that are comfortable, but not really rich, it is different. This is a big hit. Some may simply see this as a five-year period they have to sit out and wait for a change of Government.

Others will use the changes, particularly over pension pots coming into their estates, to hand money over to their children and grandchildren rather earlier than they had planned.

As for people in their early careers, the response will vary. A few will decide to accept that overseas posting in Dubai that they were pondering. Some will do nothing, and trim their expenses where they can do so.

The danger, articulated by, among others, the Institute for Fiscal Studies, is that UK tax revenue depends on too narrow a base. The top 1 per cent of UK taxpayers (those earning more than £214,000 in 2023-24) pay 29 per cent of all income tax. The top 10 per cent pay 61 per cent of it.

That is scary. You don’t need a big change in behaviour of those top earners to do huge damage to the country’s tax revenues.

I am sure the Treasury will have done the sums as to how these people might respond, just as they doubtless made assumptions about how the markets would react to the higher borrowing plan. But it is hard to have much confidence in their judgment.

It will take a few weeks for people, both individually and as managers, to work out what to do.

The sensible response was popularised by US president John F Kennedy: ‘Don’t get mad, get even.’ Governments have to have revenue. This one has decided that it needs more and that this is the best way to raise it.

Let’s see how things settle down in the weeks ahead. Let’s see what happens to the gilt market. And let’s use this as an excuse to do the financial planning we probably ought to be doing anyway.