Markets took fright yesterday after Rachel Reeves unleashed a £162billion borrowing binge.
The move has caused a spike in the cost of government debt, leading to fears of mortgage rate rises and interest rate hikes.
Yesterday’s Halloween Budget marked one of the largest increases in borrowing outside of crisis periods since 1992, enabled by the Chancellor’s decision to tweak the rules on reducing government debt over coming years.
The Office for Budget Responsibility (OBR) found Ms Reeves’ borrowing binge will amount to £32.3billion a year on average over the next five years – £161.5billion in total.
And the economic watchdog warned debt is now on course to rise to a staggering £3trillion in two years – two years earlier than previously forecast.
Yesterday’s Halloween Budget marked one of the largest increases in borrowing outside of crisis periods since 1992
Chancellor Rachel Reeves said the country had ‘voted for change’ and vowed to ‘invest’ as she mounts one of the biggest raids in history in the Commons
Spending on servicing that debt is expected to rise by an annual average of £3.4billion over the next five years – hitting £122.2 billion a year by 2029/30.
In another concerning sign, gilt yields – the rate investors expect to earn from lending to the Government – climbed close to 4.4 per cent, the highest level months in five months.
Yields peaked at just over 4.6 per cent in the wake of Liz Truss’s notorious mini-Budget in the autumn of 2022 – the main difference then being that they climbed much more suddenly.
The OBR also predicts mortgage rates could rise by almost a percentage point to 4.5 per cent over the next three years.
In its Economic and Fiscal Outlook report, released alongside the Budget, the OBR said: ‘Average interest rates on the stock of mortgages are expected to rise from around 3.7 per cent in 2024 to a peak of 4.5 per cent in 2027, then remain around that level until the end of the forecast [which is 2030].’
Jamie Lennox, director of Norwich-based broker Dimora Mortgages, said: ‘Do not assume mortgage rates are going to continue to go down just because they have recently – because the Office for Budget Responsibility has a real understanding of the situation.
‘The cost of funding higher minimum wages and providing pay increases for public sector workers with all these tax hikes means that the cost of borrowing for the Government is likely to go up – and this could hurt our mortgage rates.’
Markets are no longer betting on two Bank of England base rate cuts this year – as before the Budget. City traders are still betting the Bank of England will cut rates by a quarter of a percentage point next week. But the Budget appears to have killed the chances of a pre-Christmas rate cut, which markets had previously been expecting. Last night markets were offering just a 40 per chance of a further cut in December.
The OBR said the Budget measures will take the tax burden to a record 38 per cent of GDP
The OBR warned that interest rates are likely to stay high for longer due to the Budget
The Budget tax hike rivals 1993’s eyewatering revenue-raiser in the wake of Black Wednesday – and might be even bigger if measured at current prices rather than as a proportion of GDP
Ms Reeves carried out the traditional photo op outside the famous No11 black door today
Tory former chancellor Lord Lamont warned that the Government’s ‘gigantic increase in borrowing’ risks driving up interest rates.
He told Sky News: ‘We can’t go on a great borrowing spree. The thing that is surprising to me is that [Labour] said very clearly in the Election that they would not alter the spending rules.
‘And yet, here they are. They’ve decided to go to a definition of public sector borrowing that includes financial assets like student loans.’
Neil Wilson, chief market analyst at City trading firm Finalto, said the bond market ructions ‘reflect the major concern’ about extra borrowing and debt. ‘Bond vigilantes are sniffing it out,’ he added.
Hal Cook, senior investment analyst at Hargreaves Lansdown, said: ‘Gilt yields have been rising since mid-September. There are a few reasons for this, and the looming 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 sentiment towards the attractiveness of UK government debt.
‘However you cut it, more spending usually equals more borrowing. And more debt usually means a higher cost of debt.’