Double budget blow for Reeves: British bond yields hit post-election high as UK business confidence sinks

Rachel Reeves faces a budget headache as government borrowing costs soar and business confidence sinks amid anxiety over soaring debt and rising taxes.

In a sign of concern among global investors about the Chancellor’s plans, bond yields have risen sharply in recent days and yesterday reached the highest level since Labor came to power.

Reeves has been warned he is walking a “tightrope” as he seeks to deliver on his spending promises while avoiding a repeat of the slump in bond markets seen after Liz Truss’ mini-Budget two years ago.

“Investors fear that Labor will finance more investment with more debt,” said Elias Haddad, market strategist at private investment bank Brown Brothers Harriman.

Borrowing costs have also risen on suggestions that the Bank of England will cut interest rates only slowly.

At the same time, confidence is declining as businesses prepare for a series of tax increases that could hit investment and cost jobs.

A survey by the Institute of Chartered Accountants in England and Wales (ICAEW) is the latest to show the impact Labor pessimism is having on the economy.

The group’s business confidence monitor – a quarterly survey of corporate sentiment – ​​fell in the three months after the general election for the first time in a year.

ICAEW economic director Suren Thiru said “fears of a painful Budget” on October 30 have “hit business confidence”.

Similar warnings come from the British Chambers of Commerce, the Confederation of British Industry and the Institute of Directors.

Reeves has been criticized for slowing the economy, claiming Labor has inherited “the worst set of circumstances since the Second World War” and identifying an apparent £22bn black hole in the public finances.

The Chancellor is fighting to raise the taxes needed to fill the gap and fund her spending plans. It is believed it could relax its borrowing and debt rules to create the space needed to increase investment.

But the risks associated with such a move have been highlighted in bond markets, with the 10-year bond yield yesterday reaching 4.22 percent, the highest level since the election.

In mid-September they were around 3.75 percent.

The yield on the 30-year bond – another key measure of how much it costs the Government to borrow on international markets – also surpassed 4.75 per cent yesterday for the first time since the Labor Party came to power.

Neil Wilson, chief market analyst at brokerage Finalto, said: “Labour may want to change the debt rule to allow more loans for investment. The bond market may not allow it. The memory of the panic of the Trusses is still alive.

Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said: “Reeves needs to walk a tightrope, otherwise the gold market will limit his ability to deliver much of Labour’s agenda.”

Reeves has already watered down proposals to raise extra money from non-mainstream and private equity staff, while he also appears to have abandoned a planned raid on pension tax relief.

But increases to capital gains tax, inheritance tax and fuel tax are planned, along with pension reforms and a possible increase in employers’ national insurance contributions.