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The “fix the foundation” budget presented by Rachel Reeves this week has done nothing of the sort.
It has disrupted the same bond markets that forced Liz Truss from office, raised questions about whether the Bank of England will lower interest rates next week, and been met with disdain by credit rating agencies Moody’s and S&P.
In an effort to calm the troubled waters, Treasury chief financial secretary Darren Jones has been in the radio and television studios. His sorry performance, with references to Labour’s £22bn Tory black hole inheritance, demonstrated naivety. The problem for financiers is no longer an unfinished conservative issue but a leftist budget that increases taxes and has destabilized the city.
Reeves and the Treasury believed they could get away with changing tax rules to encourage investment.
They were wrong for two reasons. Firstly, there is no confidence in the new debt rule, which takes into account assets such as holdings of gilts, student loans and government holdings in the Bank of England.
Mistake: Rachel Reeves and the Treasury thought they could get away with changing tax rules to encourage investment.
The value of such “assets” rises and falls and the further one looks into the future, the more likely it is that the scope for future investments will be reduced.
Secondly, the big spending Reeves outlined in the Budget – on the NHS and schools – is slow and measuring the impact on productivity is difficult.
The NHS has been devouring public resources for years without appreciable improvements. It is not satisfactory for children to receive instruction in portakabins due to structural problems in some buildings.
However, one of the unrecognized achievements of Conservative governments, largely to the credit of Michael Gove, was the focus on science, technology, engineering and mathematics (STEM) subjects. This sent Britain soaring up the OECD education score despite the concrete RAAC.
Labour’s arrogance at atoning for Tory incompetence and its repeated invocation of the Truss tantrum are coming back to haunt the Government.
When he took office on July 5, the economic reality was that bond markets were calm, output in the first months of the year was spectacular (to quote the Office for National Statistics), inflation had once again reached the target and interest rates fell. .
None of that is true now. Bond rates have risen close to Liz Truss levels, the latest factory activity survey has fallen below 50 per cent, confidence in the UK’s fiscal stance has been erased and the cost of mortgage fixes is increasing.
If Reeves and company were hoping to receive hosannas from the financial and business community for what turns out to have been an anti-business Budget – which confused the fiscal fundamentals – they will be sorely disappointed.
Missing from the Treasury team and the Conservative benches is real business experience and the presence of the kind of éminence grise adopted by previous Labor governments. Harold Lever and Joel Barnett were the great fixers of the Wilson and Callaghan administrations of the 1960s and 1970s. Gordon Brown had Geoffrey Robinson at his side. As smart as Darren Jones is, it’s not exactly the same.
Reeves’ change in tax rules and the impact of the national insurance surcharge on GPs, care homes and hospices has unraveled his budget with remarkable speed. Small farmers are furious. Thousands of wealth creators are heading to Milan, Dubai and elsewhere.
The most worrying thing must be the erosion of confidence in the money markets.
That’s really hard to fix.
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