Budget: Hostile market response as chancellor suffers Halloween nightmare
First things first: don’t panic.
What you need to know is this. The budget has not gone down well in financial markets. Indeed, it’s gone down about as badly as any budget in recent years, save for Liz Truss’s mini-budget.
The pound is weaker. Government bond yields (essentially, the interest rate the exchequer pays on its debt) have gone up.
That’s precisely the opposite market reaction to the one chancellors like to see after they commend their fiscal statements to the house.
In hindsight, perhaps we shouldn’t be surprised.
After all, the new government just committed itself to considerably more borrowing than its predecessors – about £140bn more borrowing in the coming years. And that money has to be borrowed from someone – namely, financial markets.
But those financial markets are now reassessing how keen they are to lend to the UK.
The upshot is that the pound has fallen quite sharply (the biggest two-day fall in trade-weighted sterling in 18 months) and gilt yields – the interest rate paid by the government – have risen quite sharply.
This was all beginning to crystallise shortly after the budget speech, with yields beginning to rise and the pound beginning to weaken, the moment investors and economists got their hands on the budget documentation.
Please use Chrome browser for a more accessible video player
Chancellor challenged over gilt yield spike
But the falls in the pound and the rises in the bond yields accelerated today.
This is not, to be absolutely clear, the kind of response any chancellor wants to see after a budget – let alone their first budget in office.
Indeed, I can’t remember another budget which saw as hostile a market response as this one in many years – save for one.
That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here is where you’ll find the silver lining for Keir Starmer and Rachel Reeves.
The rises in gilt yields and falls in sterling in recent hours and days are still far shy of what took place in the run up and aftermath of the mini-budget. This does not yet feel like a crisis moment for UK markets.
But nor is it anything like good news for the government. In fact, it’s pretty awful. Because higher borrowing rates for UK debt mean it (well, us) will end up paying considerably more to service our debt in the coming years.
Rachel Reeves leaving 11 Downing Street before the budget. Pic: PA
And that debt is about to balloon dramatically because of the plans laid down by the chancellor this week.
And this is where things get particularly sticky for Ms Reeves.
In that budget documentation, the Office for Budget Responsibility said the chancellor could afford to see those gilt yields rise by about 1.3 percentage points, but then when they exceeded this level, the so-called “headroom” she had against her fiscal rules would evaporate.
Read more:
Chancellor defends £40bn tax rises
Hefty tax and spending plans a huge gamble – analysis
In other words, she’d break those rules – which, recall, are considerably less strict than the ones she inherited from Jeremy Hunt.
Which raises the question: where are those gilt yields right now? How close are they to the danger zone where the chancellor ends up breaking her rules?
Short answer: worryingly close. Because, right now, the yield on five-year government debt (which is the maturity the OBR focuses on most) is more than halfway towards that danger zone – only 56 basis points away from hitting the point where debt interest costs eat up any leeway the chancellor has to avoid breaking her rules.
Now, we are not in crisis territory yet. Nor can every move in currencies and bonds be attributed to this budget.
Keep up with all the latest news from the UK and around the world by following Sky News
Markets are volatile right now. There’s lots going on: a US election next week and a Bank of England decision on interest rates next week.
The chancellor could get lucky. Gilt yields could settle in the coming days. But, right now, the UK, with its high level of public and private debt, with its new government which has just pledged to borrow many billions more in the coming years, is being closely scrutinised by the “bond vigilantes”.
A Halloween nightmare for any chancellor.
Ford’s UK boss has called on the government to provide consumer incentives of up to £5,000 per car to boost demand for electric vehicles and help the industry hit challenging climate targets.
Lisa Brankin, chair of Ford UK & Ireland, told Sky News that direct support for consumers to purchase zero-emission vehicles is crucial if the industry is to remain viable and hit challenging net zero milestones.
Last week, amid increased industry pressure, the government launched a “fast-track” review of its Zero Emission Mandate (ZEV), which sets targets for the proportion of new vehicles that must be electric – set at 22% this year for cars and 10% for vans.
Money latest: Drivers could save £50 on cover after compensation changes
Manufacturers say those targets are unrealistic, and a £15,000 fine per non-compliant vehicle is too harsh. Vauxhall owner Stellantis cited the ZEV as a factor in the closure of its Luton plant announced last week.
Speaking at Ford‘s Halewood plant on Merseyside at the launch of the Puma Gen-E, the electric version of its best-selling small SUV, Ms Brankin said consumer demand has fallen far below that envisaged when the mandate was set.
“The mandate is a really aggressive trajectory to 2030 and the phase out of new petrol and diesel vehicles. For us to get a return on our investment as a manufacturer – we have spent £380m here [at Halewood] and £2bn in Cologne – we need and want to sell electric vehicles. The problem is customers are not moving as we would want.
The electric van and Puma use the power unit produced on Merseyside. Pic: Ford
“The number one thing we want is direct customer incentives, perhaps a scrappage scheme, we have been calling for a cut in VAT on electric vehicles. Something that will incentivise customers to buy EVs, and incentivise the van and car sales that we badly need in the UK.”
Asked if the incentives would need to be in the order of £2,000-£5,000 to be effective, she said: “That is a good question, but it would need to be in that region. It will need to be substantial.”
The Puma Gen-E is significant for Ford because it is the company’s smallest and cheapest EV, with a starting price of just under £30,000, bringing it closer to mass market reach than its existing models.
The Halewood plant has just begun making the Gen-E power unit, used in both the Puma and the E-Transit Custom, the electric version of Ford’s 60-year-old commercial vehicle. They say it will now power Britain’s best-selling car and van.
It comes as the entire European car industry faces challenges in the transition away from internal combustion, including softening consumer demand, stiff Chinese competition and the threat of tariffs from the incoming second Trump administration.
Please use Chrome browser for a more accessible video player
Govt to U-turn on electric car policy?
Read more from Sky News:
Jaguar defends rebrands as new electric car revealed
Musk blocked again over ‘world’s largest pay rise’
Zilch in talks to raise £150m
Ms Brankin defended Ford’s move into electric vehicles, a transition that thus far has failed to replicate its former dominance of the UK market for petrol and diesel vehicles.
She also said state support for its UK plants at Dagenham in Essex and Halewood was dwarfed by the company’s investment.
“The support we’ve had from the government is still far below the amount that we’ve poured into our business to make the EV transition. And for us to have a sustainable business it’s important that it’s profitable for us going forward if we are going to protect the jobs we’ve already created.
“We have got a really good range of electric vehicles, we are just not seeing customers making the switch as fast as we would want them to.”
The Office for National Statistics (ONS) has admitted efforts to overhaul unreliable data on Britain’s jobs market may not be ready until 2027.
The ONS confirmed it is now “unlikely” it will be able to introduce a revamped version of its Labour Force Survey (LFS) – which is the official measure of employment and unemployment in the UK – by mid-2025, leaving policymakers in the dark over the true state of the UK workforce.
Money blog: Christmas decorations could slow down your WiFi
Governor of the Bank Andrew Bailey said it was “a substantial problem” that the exact numbers of people at work are unknown in part due to fewer people answering the phone when the ONS call.
While the labour market is going to be “the key” to future rate cuts, another member of the interest rate decider Professor Alan Taylor told the MPs of the Treasury Committee last month: “We don’t necessarily have the best statistics there.”
The government too has built policy around the belief that the UK has a high number of people out of work and not looking for work.
Just last week the government announced £240m for reforms to “get Britain working”.
Please use Chrome browser for a more accessible video player
‘The benefits system can incentivise and disincentivise work’
But on the same day, the Bank’s chief economist said labour force participation “has now reached the point where participation is broadly in line with a natural level it should be”.
The UK had been thought to be an outlier compared to its neighbours in that the number of people in work is lower than before the COVID-19 pandemic.
Respected thinktank the Resolution Foundation had also said that there was no rise in inactivity based on HM Revenue & Customs data and that employment had been underestimated by 930,000 since 2019.
Also revised due to changes in population is the employment estimate, which is 0.1% higher than first thought, the ONS said.
The ONS said it continued “to advise caution when interpreting changes” in things like unemployment and economic inactivity.
More than a year ago in October 2023, the ONS temporarily suspended publication of its official labour force survey due to low response rates after the pandemic and began releasing experimental estimates that relied on tax and other data sources.
-
Sports2 years ago‘Storybook stuff’: Inside the night Bryce Harper sent the Phillies to the World Series
-
Sports8 months agoStory injured on diving stop, exits Red Sox game
-
Sports2 years agoMLB Rank 2023: Ranking baseball’s top 100 players
-
Sports1 year agoGame 1 of WS least-watched in recorded history
-
Sports3 years ago
Team Europe easily wins 4th straight Laver Cup
-
Environment2 years agoJapan and South Korea have a lot at stake in a free and open South China Sea
-
Environment2 years agoGame-changing Lectric XPedition launched as affordable electric cargo bike
-
Business2 years agoBank of England’s extraordinary response to government policy is almost unthinkable | Ed Conway