Chief Secretary to the Treasury Darren Jones has emphasized the significant differences between Rachel Reeves’ recent Budget and the controversial mini-Budget delivered by former Prime Minister Liz Truss two years ago. His comments come amid rising government borrowing costs and a decline in the value of the pound following Wednesday’s Budget announcement.
The government’s borrowing costs have surged in response to Reeves’ announcement of a substantial increase in spending, prompting concerns that further borrowing may be necessary. In an effort to stabilize markets, Jones highlighted the introduction of new fiscal rules designed to ensure that public service spending is financed by tax revenues rather than continuous borrowing. He noted, “We’ve got strong fiscal rules in place so that day-to-day spending on public services is paid for by tax receipts, not borrowing every single month.”
Market reactions have been closely monitored since the Budget, with the yield on 10-year government bonds rising to its highest level in a year before experiencing a slight decline. These government bonds, known as gilts, are traditionally viewed as a safe investment, and an increase in yield suggests that investors perceive a higher risk in lending money to the government. Shorter-term two-year bond yields, which react more swiftly to market changes, have also seen increases following the Budget.
The impact of Reeves’ Budget on the housing market is already becoming apparent, according to David Hollingworth from mortgage broker L&C. He noted that several smaller lenders had begun withdrawing or repricing their mortgage offers, cautioning potential homebuyers that they may need to act quickly. “This isn’t the kind of spike of anything like mini-Budget scale, but borrowers may want to consider fixing rates sooner rather than later,” he advised.
Despite these fluctuations, the changes in government borrowing costs and currency values are relatively modest compared to the aftermath of the previous mini-Budget. Since Wednesday, the effective interest rate on government borrowing has increased by just under a quarter of a percentage point, while the pound has declined by less than one percent against the dollar. For context, following Truss’s mini-Budget, the pound plummeted 8% against the dollar, hitting an all-time low.
Reeves announced nearly £70 billion in additional spending, which will be funded through increased business taxes and additional borrowing. In response to the market movements, Reeves refrained from making specific comments but noted that the International Monetary Fund had given her Budget a “clean bill of health,” and that it complied with the fiscal rules set by the Office for Budget Responsibility.
Analysts have suggested that investor reactions may also stem from expectations that interest rate cuts will be postponed due to anticipated inflationary pressures resulting from the Budget. “Financial markets are now not expecting rates to fall below 4% until 2026,” remarked Susannah Streeter, head of money and markets at Hargreaves Lansdown.
As the government navigates these financial challenges, officials remain committed to reinforcing fiscal stability and managing public expectations amid ongoing economic uncertainty.
