Rachel Reeves £162BILLION borrowing binge! How the Halloween Budget spooked the markets after Chancellor changes debt rules with fears tinkering could lead to higher mortgage rates

Markets took fright yesterday after Rachel Reeves unleashed a £162billion borrowing binge.


Markets took fright yesterday after Rachel Reeves unleashed a £162billion borrowing binge.

The move has caused a spike in the cost of government debt, leading to fears of mortgage rate rises and interest rate hikes.

Yesterday’s Halloween Budget marked one of the largest increases in borrowing outside of crisis periods since 1992, enabled by the Chancellor’s decision to tweak the rules on reducing government debt over coming years.

The Office for Budget Responsibility (OBR) found Ms Reeves’ borrowing binge will amount to £32.3billion a year on average over the next five years – £161.5billion in total.

And the economic watchdog warned debt is now on course to rise to a staggering £3trillion in two years – two years earlier than previously forecast.

Yesterday¿s Halloween Budget marked one of the largest increases in borrowing outside of crisis periods since 1992

Yesterday’s Halloween Budget marked one of the largest increases in borrowing outside of crisis periods since 1992 

Chancellor Rachel Reeves said the country had voted for change and vowed to invest as she mounts one of the biggest raids in history in the Commons

Spending on servicing that debt is expected to rise by an annual average of £3.4billion over the next five years – hitting £122.2 billion a year by 2029/30.

In another concerning sign, gilt yields – the rate investors expect to earn from lending to the Government – climbed close to 4.4 per cent, the highest level months in five months.

Yields peaked at just over 4.6 per cent in the wake of Liz Truss’s notorious mini-Budget in the autumn of 2022 – the main difference then being that they climbed much more suddenly.

The OBR also predicts mortgage rates could rise by almost a percentage point to 4.5 per cent over the next three years.

In its Economic and Fiscal Outlook report, released alongside the Budget, the OBR said: ‘Average interest rates on the stock of mortgages are expected to rise from around 3.7 per cent in 2024 to a peak of 4.5 per cent in 2027, then remain around that level until the end of the forecast [which is 2030].’

Jamie Lennox, director of Norwich-based broker Dimora Mortgages, said: ‘Do not assume mortgage rates are going to continue to go down just because they have recently – because the Office for Budget Responsibility has a real understanding of the situation.

‘The cost of funding higher minimum wages and providing pay increases for public sector workers with all these tax hikes means that the cost of borrowing for the Government is likely to go up – and this could hurt our mortgage rates.’

Markets are no longer betting on two Bank of England base rate cuts this year – as before the Budget. City traders are still betting the Bank of England will cut rates by a quarter of a percentage point next week. But the Budget appears to have killed the chances of a pre-Christmas rate cut, which markets had previously been expecting. Last night markets were offering just a 40 per chance of a further cut in December.

The Budget tax hike rivals 1993s eyewatering revenue-raiser in the wake of Black Wednesday - and might be even bigger if measured at current prices rather than as a proportion of GDP

The Budget tax hike rivals 1993s eyewatering revenue-raiser in the wake of Black Wednesday - and might be even bigger if measured at current prices rather than as a proportion of GDP

Ms Reeves carried out the traditional photo op outside the famous No11 black door today

Ms Reeves carried out the traditional photo op outside the famous No11 black door today 

Tory former chancellor Lord Lamont warned that the Government’s ‘gigantic increase in borrowing’ risks driving up interest rates.

He told Sky News: ‘We can’t go on a great borrowing spree. The thing that is surprising to me is that [Labour] said very clearly in the Election that they would not alter the spending rules.

‘And yet, here they are. They’ve decided to go to a definition of public sector borrowing that includes financial assets like student loans.’

Neil Wilson, chief market analyst at City trading firm Finalto, said the bond market ructions ‘reflect the major concern’ about extra borrowing and debt. ‘Bond vigilantes are sniffing it out,’ he added.

Hal Cook, senior investment analyst at Hargreaves Lansdown, said: ‘Gilt yields have been rising since mid-September. There are a few reasons for this, and the looming Budget has been one of them.

‘The uncertainty surrounding this specific Budget had made bond investors nervous, with expectations of higher future borrowing in particular weighing on sentiment towards the attractiveness of UK government debt.

‘However you cut it, more spending usually equals more borrowing. And more debt usually means a higher cost of debt.’

Budget 2024: Key points

Rachel Reeves became the first female chancellor to present a Budget today as she presented Labours first government economic plan for 14 years.

In her Budget the Chancellor: 

  • Confirmed she was raising taxes by £40billion 
  • Froze fuel duty, when it was expected she would increase it, because of the impact on consumers.
  • Increased employer National Insurance Contributions by 1.2 points to 15 per cent from April, while reducing threshold from £9,100 to £5,000, to raise £25bn.
  • Made inherited pensions subject to inheritance tax.
  • Increased lower rate of capital gains tax from 10 to 18 per cent, and the higher rate from 20 to 24 per cent
  • Reveals economic growth is forecast to be just 1.6 per cent by the end of Labours first term in office.
  • Announced a crackdown on fraud in the UKs welfare system, as part of reforms to ensure welfare spending is more sustainable. 
  • Pledged to maintain the Bank of Englands 2 per cent inflation target. 
  • Confirms National Living Wage will rise to £12.21 next year. 
  • Said she was deeply proud to be Britains first ever female Chancellor of the Exchequer.
  • Sparked uproar from the Tories by claiming it was not the first time that it has fallen to Labour to rebuild Britain.
  • Accused the Tories of calling an early election to avoid making difficult choices in the Budget themselves.
  • Announced she is setting aside £11.8bn and £1.8bn to pay victims of the infected blood and Post Office scandals respectively. 
Источник: Daily Online

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