The gilts market has much to think about following Labour’s first Budget for 14 years.
Gordon Brown may have tested everyone’s patience with his raid on pension funds in 1997 and higher taxes for the NHS in 2002, but one can never imagine him delivering anything as challenging to the public finances as Rachel Reeves.
In spite of the whopping tax increases imposed on business through the National Insurance hike on employers – which the Office for Budget Responsibility says will deprive working people of £15.5billion in wages by 2029-30 – the budget is anything but stable.
New rules: The Treasury historically has been the voice of fiscal orthodoxy and seriously worried about how interest rate costs feed borrowing and the national debt
Reeves’s new interpretation of debt may give the Government more breathing space but it doesn’t make funding of the deficit any easier.
The second revision to the Debt Management Office’s (DMO) money raising, in the current 2024-25 fiscal year, means an enormous funding requirement of £311.5billion.
That is reduced to £299.9billion by the £9billion raised by National Savings for retail investors selling ‘green’ bonds.
Incidentally, the popularity of climate change bonds demonstrates the case for assigning bonds to specific targets such as space exploration or small modular reactors (SMRs).
The DMO has a huge mountain to climb and it will not be a cost-free enterprise for the economy. The spike in the ten-year gilt to 4.39 per cent widens the gap with German bunds.
As the returns rise, they become a much bigger temptation for risk averse UK pension funds.
There was nothing directly in the Budget to drive them back into risk-based investment in quoted equities, start-ups and the like in spite of efforts by successive chancellors to encourage a change of approach.
In contrast to pension funds, some 35 per cent of UK private investors hold London-quoted shares.
If only UK asset managers could be encouraged to do the same Britain’s shortfall of investment in entrepreneurship would be more than addressed.
Reeves prepared the markets for a change in the fiscal rules to encourage borrowing for investment.
But when the bond vigilantes dig down to check the foundations, they may well detect more subsidence than is tolerable. That may not imply a ‘Truss’ like crisis but does portend higher interest rates than would otherwise be the case.
Bond rates set the price for fixed rate mortgage deals so homeowners look as if the relief they were hoping for won’t be as great.
The Treasury historically has been the voice of fiscal orthodoxy and seriously worried about how interest rate costs feed borrowing and the national debt.
It is the job of civil servants to translate government policy into reality. But in acceding to Labour’s new debt definitions, excluding vital liabilities from the reckoning, officials carelessly are gambling with credibility.
Vaccine drought
If one didn’t know better, Emma Walmsley might be accused of putting negative data out on Budget day in the hope it will be unnoticed. GSK is big enough and important enough to know that there is little chance of that.
Anyone turning on American TV in recent days might have recognised that GSK’s powerful vaccine portfolio is suffering. Big pharma has long been a force for commercial broadcasters.
Promotions for GSK’s respiratory vaccine Arexvy and its blockbuster shingles shot Shingrix are a big presence.
But despite all the advertising, Arexvy sales plunged 72 per cent to £188million in the third quarter and Shingrix also is down 7 per cent at £739million.
Clearly the jabs need a booster. The company says that both vaccines will only grow by low single digits this year.
After the recent fillip from settling the litigation over ulcer treatment Zantac, GSK’s shares took a 3.1 per cent knock.
Perhaps the Budget help for the NHS and Labour’s belief in preventative treatments will ease the pain.
Dodgy flightpath
No one will be shedding many tears for Rachel Reeves’s levy on private jet users. After all, this is a tax directed at the much disparaged super-rich.
But as we know from Monaco tax exiles and big tech avoidance, those who have the most are often reluctant to pay their fair share.
Even a minor change on the dials could lead potential investors in the UK to divert to Milan, Lisbon or Dubai.