ALEX BRUMMER: Chancellor in bond market trap

As the Labour faithful assemble in Liverpool, Chancellor Rachel Reeves’ thoughts will be focused on the early draft of the Office for Budget Responsibility’s (OBR) forecasts for productivity, growth, and the widening hole in the public finances. Unfortunately for Reeves, these forecasts are unlikely to make for easy reading.

Reeves, who endowed the OBR with extra authority soon after taking office, is reportedly not pleased with the current uncertainties surrounding the UK economy. For almost its entire existence, the OBR has maintained a consistent assessment of UK productivity, largely unaffected by changes in government. However, it has now chosen the start of Labour’s second year back in office—a time when bond markets are on tenterhooks—to rethink UK productivity, with a downgrade certain.

This adjustment can only make it harder for the Chancellor as she sets about closing a budget shortfall thought to be in the region of £30 billion.

### Political Maneuvers and Market Reactions

Some temporary relief—and political amusement—has been provided by less-than-secret leadership contender Andy Burnham. His recent New Statesman comment about not being ‘in hock’ to bond markets, coupled with a pledge for further nationalisation of utilities, has allowed Keir Starmer to unleash his party’s favourite weapon: the fear of market turmoil.

It’s now three years since the Liz Truss “fandango,” and the government’s battle cry remains: “We don’t want a repeat of that.” Yet many seem to forget how a Bank of England intervention to rescue pension funds, alongside a U-turn mini-budget from Chancellor Jeremy Hunt, ultimately turned the tide. That intervention even left some room for a national insurance cut for working people.

### Policy Focus: ID Cards, Family Benefits, and Fuel Bills

ID cards, while a costly distraction, are deemed necessary given public frustration with failed illegal migrant initiatives. However, delegates at the Labour party conference are expected to be much more interested in the party’s plans to lift the two-child cap on family benefits and their proposals for cutting fuel bills ahead of winter.

After the winter fuel allowance debacle, Labour is keen to show that it is not a heartless party after all.

### Economic Reality: Nervous Bond Markets and Growth Challenges

Understandably, the bond markets are nervous. Labour promised the highest growth in the G7, but there is little chance of achieving this anytime soon, especially with the US economy still expanding. Britain can, however, claim the dubious distinction of being at the top among rich nations for the biggest increase in annual consumer prices and the highest bond rates.

While Reeves keeps a close eye on the OBR forecasts, traders will be watching the podium in Liverpool closely. The current fragility of the long bond effectively boxes the Chancellor in.

### Fiscal Challenges Ahead

The last attempt to rein in public spending—by taking a relatively small bite out of the welfare budget—ended in an inglorious U-turn. Higher taxes now seem to be the only viable alternative.

At a Labour gathering, as might be expected, there will likely be a mistaken belief that shortfalls can be made up through more wealth taxes, attacks on pension benefits, and clobbering the banks. Even if such entrepreneurism-sapping policies were adopted, they would fall far short of closing the hole in the public finances.

Labour’s usual response to critics is to ask what alternatives they would propose. But, ultimately, it is the governing party that has the duty to meet the fiscal rules it has set for itself.

### Alternative Paths to Growth

If Labour genuinely wants more growth, it could achieve this objective by abolishing stamp duty on share trading and housing. It could also restore tax breaks such as Rishi Sunak’s double expensing for capital investment and extend reliefs to digital investment and artificial intelligence.

Such measures would be infinitely better than relying on sclerotic infrastructure spending, which may take years to ignite a meaningful economic spark.
https://www.thisismoney.co.uk/money/comment/article-15142363/ALEX-BRUMMER-Chancellor-bond-market-trap.html?ns_mchannel=rss&ns_campaign=1490&ito=1490

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