Rachel Reeves is gambling that a big cash injection for public services over the next two years will turn performance around and that extra borrowing will be worthwhile, Paul Johnson, director of the influential Institute for Fiscal Studies think tank, said in a note.

The budget puts tax on a path to 38.2% of GDP, its highest level ever in the U.K., and sees higher public service budgets funded through £28 billion more borrowing in 2025-2026 than previously planned, Johnson said.

“The first gamble is that a big cash injection for public services over the next two years will be enough to turn performance around, and that many of the temporary spending pressures won’t persist,” Johnson said, meaning Reeves may have to raise taxes further in a few years unless she “gets lucky on growth.”

“The hope is that the benefits — from more funding for public services in the next couple of years, and from more public investment throughout the parliament — will more than offset the costs. These costs include higher debt servicing costs but also, according to the OBR, higher inflation and higher interest rates than we’d otherwise have seen. A lot hinges on how well the government spends the money,” he added.

— Jenni Reid

British tech entrepreneurs breathed a sigh of relief Wednesday after the government announced a lower-than-feared increase in the rate of capital gains tax (CGT).

Finance Minister Rachel Reeves on Wednesday hiked the lower rate of CGT — a levy on the profit investors make from the sale of an investment — to 18% from 10%, while the higher rate jumped to 24% from 20%, Reeves said. The tax hikes are expected to bring in £2.5 billion, she said.

The announcement came after startup founders and investors warned that a significant increase to CGT could cause innovative tech entrepreneurs to leave the U.K. Tech lobby group Startup Coalition had warned of a potential tech “brain drain.”

However, on Wednesday, Startup Coalition’s Executive Director Dom Hallas said that the tax plans showed the government had “listened to ensure that entrepreneurs’ biggest fears have not materialised and some balance has been struck including maintaining all important R&D investment.”

Barney Hussey-Yeo, CEO and co-founder of financial management app Cleo, told CNBC last week he was considering a move to the U.S. as a result of Labour’s tax plans. However, on Wednesday, Hussey-Yeo said that the budget was “better than I thought it would be.”

Read more here.

– Ryan Browne

U.K. borrowing costs were higher as the dust settled on Reeves’ announcement of extensive tax rises and investment pledges.

By 2:55 p.m. in London, the yield on 10-year U.K. government bonds had jumped 7 basis points to 4.382%, the highest level since Labour took power at the start of July. The 2-year gilt yield was 10 basis points higher at 4.356%.

As part of the budget, the Treasury said it would raise gilt issuance by £22.2 billion ($28.9 billion) to £299.9 billion for the fiscal year to meet its net financing requirement.

Sanjay Raja, chief U.K. economist at Deutsche Bank Research, said the budget “ushered in a marked shift in fiscal policy,” with public services spending to rise by £50 billion by the end of the decade and investment spending to increase by another £20 billion.

“In the end, markets will have to grapple with higher borrowing… For now, markets remain broadly sanguine on the Chancellor’s plans. But today’s budget signals a lot more gilt issuance to come, relative to previous expectations,” Raja said.

“Equally, while the Chancellor hit reset on the fiscal framework today, headroom remains a problem… With public spending pressures only likely to increase from here, the Chancellor will be walking a tight rope between even more tax hikes and/or cuts to spending to ensure she does not fall foul of her newly designed fiscal charter.”

— Jenni Reid

The U.K.’s struggling National Health Service will receive a £22.6 billion ($29.4 billion) increase in its day-to-day budget and £3.1 billion increase in its capital budget across the next two years, Reeves said.

It it the largest real-terms growth in day-to-day NHS spending, outside of the pandemic, since the Conservative Party took power in 2010, she said.

Funding will address areas including the backlog of repairs and upgrades needed in NHS buildings, increasing capacity for procedures, adding beds and diagnostic tests and reducing waiting lists, she added.

Labour is targeting an extra 40,000 hospital appointments a week and waiting times to be reduced to no more than 18 weeks. The party will publish a 10-year plan for the health service in the spring.

— Jenni Reid

Outgoing Conservative leader Rishi Sunak slammed Reeves’ tax-raising budget, accusing her of breaking Labour’s election manifesto, and saying that her debt rule tweaks would leave Britons worse off.

“Today’s budget sees the fiscal rules fiddled, borrowing increased by billions of pounds, inflation-busting handouts for the unions, Britain’s poorest pensioners squeezed, welfare spending out of control and a spree of tax rises they promised the working people of this country they would not do,” he said.

Sunak said raises to capital gains tax, inheritance tax and business rates, among others, would push taxes to “record levels.”

“Higher borrowing, higher taxes — it’s broken promise after broken promise and working people paying the price,” he said.

Reeves said during her budget that she was keeping “every single promise on tax” made the government’s manifesto.

— Karen Gilchrist

The Office for Budget Responsibility, a government-funded but politically neutral body, raised its near-term U.K. growth outlook but lowered its longer-term projection in a five-year forecast released Wednesday.

The OBR now expects U.K. real GDP growth of 1.1% in 2024, followed by expansion of 2% in 2025, 1.8%, 1.5% and 1.5% in the following years. Its previous forecast was for 0.8% GDP growth in 2024 followed by rates of 1.9%, 2%, 1.8% and 1.8%.

The OBR said Labour’s tax measures would increase total revenues by £36.2 billion ($47 billion) a year on average and £41.5 billion by the end of the decade.

“Budget policies deliver a temporary boost to GDP in the near term and some crowding out of private activity in the medium term,” the OBR said in its report.

“We estimate that the policy package boosts real GDP by 0.6 per cent at its peak in 2025-26 as the fiscal loosening temporarily raises output above its potential level. This temporary stimulus fades to zero over the remainder of the forecast as we assume monetary policy acts to rein in any excess demand.”

— Jenni Reid

Shares of Britain’s banks rose on Wednesday afternoon after it appeared the Labour government’s first budget in nearly 15 years would stop short of imposing a levy on the sector’s profits.

Among a litany of tax rises announced to allow for more borrowing to boost investment, U.K. Rachel Reeves did not mention whether the government had plans to raise taxes on the country’s banks.

Shares of Barclays rose 3% on the news, with NatWest up more than 2% and Lloyds trading 0.3% higher.

— Sam Meredith

The capital gains tax rate on carried interest will increase to 32% from April 2025, a rise from its current rate of 28%.

Carried interest is the share of profits received by fund managers on the overall profits of a private investment fund. It is charged as under CGT rather than income tax.

“The fund management industry provides a vital contribution to our economy,” Reeves said. “But as our manifesto set out, there needs to be a fairer approach to the way carried interest is taxed.”

— Karen Gilchrist

U.K. Finance Minister Rachel Reeves confirmed a move to target public sector net financial liabilities (PSNFL) as a measure of the country’s debt in a move designed to free up billions of pounds for long-term investments.

Reeves said the move to target PSNFL, rather than public sector net debt, means she will be left with £15.7 billion ($20.4 billion) of headroom at the end of the Office for Budget Responsibility’s forecast period.

That’s “much lower than expected,” said Paul Johnson, director of the Institute for Fiscal Studies, an influential think tank.

The PSNFL measure takes in a wider account of the government’s balance sheet, including financial assets and liabilities, than public sector net debt.

Reeves said last week that she intended to change the country’s fiscal rules but had stopped short of specifying exactly what the new so-called investment rule would change.

— Sam Meredith

Hikes to employer National Insurance contributions were met with a mixed reaction by U.K. businesses.

“With the exception of very small businesses, this revenue raising measure is likely to have immediate knock-on consequences whether that is pausing hiring, scaling back or scrapping pay increases and/or reviewing existing employee benefit arrangements,” Damon Hopkins, head of DC workplace savings at Broadstone, said in emailed comments.

“It is positive that the Government looks to have resisted the temptation to introduce National Insurance on employers’ pension contributions which may have had the impact of reducing contributions at a time when we need to be doing all we can to help workers save more into their pension pots,” Hopkins added.

The Federation of Small Businesses, a trade group, praised the hike in the Employment Allowance which allows eligible employers to reduce their annual National Insurance liability.

“That’s £10,500 off every small employer’s National Insurance Bill ever year. This is up from £5,000 and will be a huge help for small firms,” the group said.

Around 865,000 employers will not pay any NI due to the change, while over 1 million will pay the same amount, Reeves said.

Reeves said she acknowledged she was asking “businesses to contribute more,” which would have an impact beyond just themselves. She noted that the step was nevertheless necessary to fund schools and the National Health Service.

— Jenni Reid

Inheritance tax (IHT) thresholds will be frozen for a further two years until 2030.

The tax-free threshold on inherited estates currently stands at £325,000 ($422,000), and at £500,000 if the estate includes a residence passed on to direct descendants.

Inherited pensions will be brought into IHT from April 2027. A 50% IHT relief will be applied to shares held on the Alternative Investment Market (AIM) and on other similar markets, setting the effective rate at 20%.

Together, the measures are forecast to raise £2 billion by the final year of the OBR’s forecast.

— Karen Gilchrist

The Energy Profits Levy on oil and gas companies is set to be raised to 38% from 35% and be extended from March 2029 to March 2030.

The levy was introduced in May 2022 to address “extraordinary profits” of oil and gas companies operating in the U.K. and on the U.K. Continental Shelf.

“To ensure the oil and gas industry can protect jobs and support our energy security, we will maintain the 100% first year allowances and the decarbonization allowance too,” Reeves said.

— Jenni Reid

Private school fees will rise from January 2025 with the introduction of a 20% VAT charge.

Traditionally, private schools have been eligible for tax breaks, like charitable business rate relief, meaning they don’t have to charge VAT on tuition or boarding fees.

There are around 2,500 private schools in the U.K., which educate around 6% of school-aged children, according to the Independent Schools Council.

— Karen Gilchrist

Wealthy foreigners living in the U.K. will no longer benefit from non-dom tax status, following the abolition of the controversial regime.

Finance Minister Rachel Reeves said Wednesday the “outdated concept of domicile” will be removed from the tax system from April 2025, and that it would be replaced by a new “internationally competitive” residence-based scheme. She also said temporary repatriation relief would be extended to three years and its scope expanded.

The Office for Budget Responsibility has forecast that the measures would raise £12.7 billion over the next five years, Reeves said.

“I have always said that if you make Britain your home, you should pay your tax here,” Reeves said.

Britain’s non-dom regime is a 200-year-old tax rule, which permits people living in the U.K. but who are domiciled elsewhere to avoid paying tax on income and capital gains earnings overseas for up to 15 years.

Labour set out plans in August to abolish the preferential status, expanding on a pledge set out in its election manifesto, and stepping up earlier proposals by the previous Conservative government to phase out the regime over time. Labour’s new measures were set to ban the use of trusts and impose inheritance tax on worldwide assets to boost equality and generate more income for the Treasury.

In the weeks leading up to the budget, however, non-doms and their advisers began lobbying the government to reconsider the most punitive changes, arguing that a clampdown would spark a wealth exodus rather than raising Treasury coffers.

As of 2023, an estimated 74,000 people enjoyed the status, up from 68,900 the previous year.

— Karen Gilchrist

Shares of U.K. homebuilders rose on Wednesday afternoon, extending gains as U.K. Finance Minister Rachel Reeves delivered the Labour government’s budget plan.

Homebuilders Barratt and Persimmon gained 2.8% and 2.2%, respectively. Shares of Vistry added 1.8%, while Taylor Wimpey was last seen trading 2% higher.

— Sam Meredith

Air Passenger Duty, paid at different rates by aircraft operators but often passed on as a cost to consumers, will rise by “no more than £2 for an economy class short-haul flight,” Reeves said.

The rate of APD paid on private jets will be hiked by 50%, she added.

A system which raises the duty on tobacco products by 2% above retail price inflation will be renewed for the remainder of the government’s term in office, along with a one-off hike in the tax.

A flat-rate tax on all vaping liquid will meanwhile come into force from October 2026, she said.

The tobacco and vaping measures, along with a one-off increase in the Soft Drinks Industry Levy, will raise nearly £1 billion a year by the end of the five-year forecast, she said.

Alcohol duty rates on non-draught products will rise in-line with retail price inflation, but duties on drinks served on draught will be cut by 1.7%.

— Jenni Reid

Reeves on Wednesday said she plans to catalyze £70 billion ($90.8 billion) of investment through the National Wealth Fund, the U.K.’s newly created sovereign wealth fund.

Plans to form the National Wealth Fund, inspired in part by similar state-backed investment funds like Norway’s Government Pension Fund Global and Saudi Arabia’s Public Investment Fund, were announced by Labour early this year.

“We are catalyzing 70 billion pounds of investment through the National Wealth Fund,” Reeves said Wednesday, as she outlined the government’s tax and spending plans.

Based in Leeds, the National Wealth Fund was established to help speed up economic growth and accelerate the transition toward clean energy.

Earlier this month, Reeves said the fund would work with industry partners, including mayors, to deploy up to £27.8 billion of investment. Of that sum, £22 billion would come from the U.K. Infrastructure Bank, with the remaining £5.8 billion coming from the taxpayer.

– Ryan Browne

Capital Gains Tax (CGT) will rise to 18% from 10% for lower rate taxpayers and to 24% from 20% for higher rate payers.

CGT on the sale of residential homes will remain steady at 18% to 24%.

Business asset disposal relief will rise from 10% to 14% in April 2025, before rising further to 18% from 2026. A lifetime limit for business asset disposal relief will remain at £1 million.

— Karen Gilchrist

Reeves said she would freeze fuel duty next year and maintain a temporary cut of 5 pence per liter in the rate for another year, for a cost of £3 billion in 2025.

“While I have sought to protect working people with measures to reduce the cost of living, I have had to take some very difficult decisions on tax,” she said.

“At a time when the fiscal position is so difficult, I have to be frank with the house that this is a substantial commitment to make. I have concluded that, in these difficult circumstances, while the cost of living remains high and with a backdrop of global uncertainty, increasing fuel duty next year would be the wrong choice for working people.”

The 5-pence cut was introduced by the rival Conservative Party in 2022.

— Jenni Reid

Employers will pay out more in National Insurance (NI), a tax on earnings, in a move expected to be one of the biggest revenue-raisers for the Treasury.

Employers currently pay a rate of 13.8% in NI on a worker’s earnings above £9,100 per year. That will rise to a 15% rate on salaries above £5,000 a year.

Reeves said this would raise £25 billion ($32.4 billion) per year by the end of the forecast period.

“I know that this is a difficult choice. I do not take this decision lightly,” she said.

Treasury sources had previously leaked the changes to the BBC.

— Jenni Reid

The independent Office for Budget Responsibility will release updated GDP growth forecasts of 1.1% for 2024 and 2% in 2025, Reeves said.

That compares with previous forecasts for 0.8% growth in 2024 and 1.9% in 2025.

She said the OBR would also release a detailed assessment of the growth impact of the government’s policies over the next decade.

“We will balance the current budget in the third year at every budget, held annually each autumn. That will provide a tougher constraint on [day-to-day] spending, so difficult decisions cannot be constantly delayed or deferred,” Reeves said.

She added that under current forecasts, the OBR saw the current budget in deficit by £26.2 billion in 2025-2026 and would hit a surplus of £10.9 billion in 2027-2028.

— Jenni Reid

Reeves announced fresh investment to modernize HMRC’s systems and recruit additional compliance staff in a bid to curb tax avoidance and raise £6.5 billion by the end of the decade. HRMC is the U.K.’s tax, payments and customs authority.

“We will clamp down on those umbrella companies who exploit workers … increase the interest rate on unpaid tax debt to ensure people pay on time … and go after promoters of tax avoidance schemes,” she said.

— Karen Gilchrist

The British Sterling extended losses recorded earlier in the day against the dollar as Finance Minister Rachel Reeves presented the U.K. budget on Wednesday.

Sterling was last down 0.58% to trade at $1.2940 at 12:56 p.m. London time.

Reeves said her budget will include £40 billion ($51.8 billion) worth of tax rises to plug a black hole in the public finances, allow for investment in public services and for compensation payments.

“Any Chancellor standing here today would face this reality and any responsible Chancellor would take action,” she said. “That is why today, I am restoring stability to our public finances and rebuilding our public services.”

— Karen Gilchrist

Reeves repeated her claim that Labour in July exposed a £22 billion ($28.5 billion) “black hole” in the previous Conservative government’s spending plans.

The independent Office for Budget Responsibility is due to release a report addressing this claim and publishing its latest economic outlook on Wednesday.

“Today, on top of the detailed document that I provided to the House in July the government is publishing a line by line breakdown of the £22 billion black hole that we inherited, which shows hundreds of unfunded pressures on the public finances,” she said.

She also said that the OBR review would say that the previous government “did not provide the OBR with all the available information to them” in order to create its Spring forecast in March.

“Had they known about these ‘undisclosed spending pressures that have since come to light,’ then their Spring Budget forecast for spending would have been, and I quote again: ‘materially different.’ Let me be clear, that means any comparison between today’s forecast and the OBR’s March forecast is false because the party opposite hid the reality of their public spending plans,” she said.

The £22 billion figure has proven controversial. Former Finance Minister Jeremy Hunt in July wrote to Simon Case, head of the British civil service, calling Labour’s claims about the public finances “deeply troubling.”

Hunt said the alleged £22 billion gap differed from the “main estimates” for spending presented for approval before members of Parliament on July 17. He added that the disparity in figures risked bringing the politically neutral civil service into disrepute, since estimates are signed off by its senior officials.

Hunt this week said that the OBR would breach its political impartiality by publishing its report on the shortfall on the same day as the budget, because it would be used by Reeves to justify tax rises.

— Jenni Reid

Reeves has begun delivering the 2024 budget, highlighting that it is the U.K.’s first-ever one presented by a woman.

“This government was given a mandate. To restore stability to our country, and to begin a decade of national renewal. To fix the foundations,” she said.

“Change must be felt. More [sterling] pounds in people’s pockets. A [National Health Service] that is there when you need it. An economy that is growing, creating wealth and opportunity for all, because that is the only way to improve living standards. And the only way to drive economic growth is to invest, invest, invest. There are no shortcuts.”

She added, “To deliver that investment we must restore economic stability and turn the page on the last 14 years.”

– Jenni Reid

The U.K.’s FTSE 100 was seen ticking lower in the lead-up to Reeves’ budget announcement.

The index was down 0.44% to 8,183 by 11:42 a.m. London time, less than an hour before her speech.

Sterling also dipped 0.36% to trade at $1.2968.

Reeves is pictured on Downing Street, posing for the chancellor’s traditional red box photo less than an hour ahead of her budget announcement.

Business veteran Warren East urged greater clarity on the U.K.’s much discussed industrial strategy in Wednesday’s budget, saying greater guidance on upskilling and infrastructure plans were particularly crucial to spur investment.

“So far the noises coming out of the government are encouraging to hear, but we’d like to hear some more detail,” East, who served as CEO of both Rolls-Royce and Arm, told CNBC’s “Squawk Box Europe” Wednesday.

“Over the next 12 months, if we can demonstrate really getting on and doing it, that will give business a lot of confidence. And business really is the vehicle through which all of this is going to be delivered,” added East, who is currently chair of air traffic control services organization, NATS Holdings.

— Karen Gilchrist

U.K. Trade Minister Douglas Alexander said that Wednesday’s budget would repair the country’s finances and provide critical reform.

“This will be a budget that, if you like, repairs the fiscally impaired balance sheet we inherited, delivers economic stability, delivers economic investment, and delivers policy reform,” Alexander told CNBC’s Dan Murphy on Tuesday at the Future Investment Initiative in Riyadh, Saudi Arabia.

— Karen Gilchrist

Former Conservative Investment Minister Dominic Johnson on Wednesday defended the Tory’s record in government, saying allegations of a black hole in the public finances were “disingenuous” and insisting that Reeves’ proposed tax hikes would do little to boost growth.

“I’m not really sure about these black holes,” he told “Squawk Box Europe,” noting that he did not trust estimates of a £22 billion — and growing — reported spending shortfall.

Johnson also criticised Labour for slamming the economy and said anticipated tax rises on international investors such as wealthy non-doms were scaring away potential growth drivers.

“They have to start being more responsible in how they talk about the economy and they have to be more thoughtful about how they genuinely provide growth —and it’s not going to come from tax hikes,” he said.

“Having the international investor base come to London and base themselves here is an enormous domestic advantage,” he said. “Even talking about frightening them away is a massive problem,” he added.

Johnson indicated, however, that Reeves’ proposed changes to the U.K.’s debt rule were “a very sensible idea,” conceding it was a measure he had been unable to enact while in office.

— Karen Gilchrist

U.K. bond yields hovered at multi-month highs Wednesday morning as markets remain anxious about a proposed loosening of the country’s borrowing rules in Reeves’ budget announcement.

The yield on the benchmark 10-year gilt dipped less than a basis point at 4.312% by 7:30 a.m. London time, having reached their highest level since July during Tuesday’s session. Yields and prices move in opposite directions. One basis point equals 0.01%.

Traders are cautious on Reeves’ proposed changes and any increase in borrowing which could spark a sell-off, as it did in dramatic fashion with former Prime Minister Liz Truss’ unfunded tax cuts just over two years ago.

— Karen Gilchrist

Reeves said Tuesday that the U.K.’s minimum hourly wage for over 21-year-olds would rise by 6.7% to £12.21 ($15.87) from next April, in a signal of what could be further support measures for “working people” in Wednesday’s budget.

For younger workers aged 18 to 20 years old, the minimum pay rate will rise by 16% to £10 an hour, while for apprentices aged 16 to 17, the hourly rate will rise 18% to £7.55.

The increase is intended to keep the minimum adult wage at two-thirds of median earnings, after fresh data showed average earnings were higher than originally thought in 2023 and expected to grow further.

The government, which has vowed to protect “working people,” said the measures are expected to benefit more than 3 million workers.

— Karen Gilchrist

After months of commentary from Labour officials, economists are eyeing billions of new public spending and tax rises ahead.

The party has already announced some of the areas it will gain extra tax revenue from, including changes to the rules on so-called “non-doms” whose permanent residence is outside of the U.K. for tax purposes; a higher energy profit levy; an increase in duties paid by overseas nationals buying U.K. residential property; and the introduction of value added tax (VAT) on private school fees.

Researchers at bank Barclays said in a note last week they expect between £20 billion ($26 billion) and £36 billion in additional spending for 2025 to 2026, offset by around £23 billion in extra revenue from tax increases — with higher employer contributions to National Insurance, a general taxation, playing a key role.

Citing government sources, the BBC has reported that the budget will both raise the percentage that employers pay in NI per worker, and also lower the rate at which they begin to pay it. This could raise a total £20 billion, according to economists.

Consultancy Deloitte highlights several unknowns to look out for in the budget, including on business rates, capital gains tax, inheritance tax and changes to taxes on the performance of carried interest payments in private equity.

Economists at Investec said in a note Monday that budget measures could include higher capital gains taxes on the sale of shares; closing or reducing the benefit from the “carried interest loophole;” potential changes to the pension system, such as a reduction in the lump sum amount that can be drawn down tax free; and the closure of some inheritance tax loopholes. Hikes to air passenger duties and bank corporation tax surcharges could also be raised, the said.

Analysts also say so-called “sin taxes” could be a Labour target, on areas such as gambling, vaping products and tobacco.

— Jenni Reid

Reeves last week confirmed she intends to change U.K. fiscal rules as part of the budget, enabling her to free up billions of pounds for investment.

Writing in The Financial Times, Reeves said the change “will make space for increased investment in the fabric of our economy, and ensure we don’t see the falls in public sector investment that were planned under the last government.”

Reeves did not specify exactly what the investment rule would change, but it has been reported the Treasury could target public sector net financial liabilities (PSNFL) in the U.K.’s measure of debt, rather than public sector net debt.

The PSNFL measure takes in a wider account of the government’s balance sheet, including financial assets and liabilities, compared to public sector net debt.

The Institute for Fiscal Studies, an influential think tank, said on Sept. 30 that a change in the fiscal rules to target PSNFL would offer as much as £50 billion ($64.8 billion) of additional headroom for the government.

— Sam Meredith

U.K. Prime Minister Keir Starmer and Finance Minister Rachel Reeves have delivered one message clearly in the run-up to the budget: pain now, for gain — in the form of economic growth — later.

Starmer has said his government will take “painful” decisions in order to close a hefty budgeting shortfall left by the previous administration, adding that those with the “broadest shoulders should bear the heavier burden.”

An early controversial decision has been to introduce means testing on winter fuel support payouts for pensioners.

His pledge not to raise taxes on “working people” has sparked debate over what defines that group. Subsequent comments by Labour figures have suggested this is a commitment not to raise income tax or national insurance contributions; but higher taxes for business owners or those who make income through shares or assets such as property have not been ruled out.

Reeves has vowed that there will be “no return to austerity,” referencing the economic program introduced by the Conservative Party in 2010 in the wake of the global financial crisis which involved deep cuts to public spending.

She has said this is because she will increase investment in areas including infrastructure and the energy transition.

All eyes are now on how Starmer and Reeves attempt to balance promises to boost public investment and increase funding to struggling areas such as the National Health Service, while also meeting their self-proclaimed “fiscal rules” to move the budget into balance and see debt fall as a share of GDP within five years.

Close attention will be paid to the response of the U.K. bond market to Wednesday’s budget, which comes two years after a huge package of unfunded tax cuts announced by former Prime Minister Liz Truss caused yields to spike.

“If there’s one thing bond vigilantes hate more than an expansive budget it is a surprisingly expansive budget,” George Lagarias, chief economist at Forvis Mazars, said Tuesday — noting this explains why some upcoming changes have been leaked to the press in recent days.

“It is a challenge when a new Chancellor is presenting a budget. An even bigger one when it is on behalf of a completely new government, especially from a party known for fiscal expansion. The level of difficulty is further raised by the fact that bond markets have been especially jittery in the past few weeks, as traders find themselves in need to readjust their rate expectations for the U.S., in light of stronger growth data,” Lagarias said.

“Shifting the accounting rules is a very old practice and might be less effective at a time when bond markets are looking carefully [at the Budget] … Ultimately, however, governments will need to figure out ways to significantly improve productivity if they are to maintain their citizens’ way of life,” Lagarias added.

Joe Maher, assistant economist at Capital Economics, said in a note Monday that the current macroeconomic backdrop was “much less conducive to a bond market panic than [under Truss] in September 2022,” when it was feared fiscal expansion would push inflation and interest rates higher.

“By contrast, we suspect that investors are now likely to be more tolerant of looser fiscal policy given inflation has fallen back to the Bank of England’s 2% inflation target and interest rates are likely to trend downwards,” Maher said.

Maher added that bond market nerves should also be eased by Labour’s repeated assurances on its fiscal prudence, the likely need for less of an increase in government borrowing than Truss’s plan would have required, and the fact that increased borrowing would be for public investment.

— Jenni Reid