HAMISH MCRAE: How the Chancellor’s budget failed

This was not meant to happen. Of course, Chancellor Rachel Reeves would have expected political attacks on her budget and some corporate backlash. That’s fair.

But with the slightly reluctant support of the Office for Budget Responsibility at his side, plus words of encouragement from his talks with the International Monetary Fund in Washington, he must have hoped the markets would buy his story. She would be a responsible guardian of the UK’s finances.

Well, that gold market distress, with the ten-year yield on UK government bonds soaring above 4.5 per cent on both Thursday and Friday, was not in the plan.

It always takes a few days for markets to stabilize after a big fiscal policy change, but a quick judgment is that your budget will, at best, add a quarter of a percentage point to UK long-term interest rates. and, at worst, half a percentage point. or a little more.

That means everyone – businesses, mortgage holders, etc. – will have to pay a quarter or half a percentage point more for long-term loans than they would have if they had stuck to Jeremy Hunt’s borrowing plans.

She didn’t see it coming, and that worries me for her advisors: smart people who have no knowledge or experience of how markets think.

In a situation like this you have to look at what people do, not what they say they will do. This applies to the response to the rest of the Budget.

Take the increase in employers’ National Insurance contributions, for example. We know that companies have to figure out what they will do. That will vary from one sector to another. But we don’t know the balance they will strike between cutting staff, cutting salaries and raising prices. I spoke to a company about this and felt that they would simply run their business with fewer people.

Others will act differently, but we won’t know for at least six months where the balance will be. There will be job losses. We have no idea how many.

The same goes for other reactions to the Budget. The big question – and again, don’t listen to what people say, watch what they do – is how moderately well-off families will respond to the attack on their wealth.

The truly rich will have already made their plans and it will be a matter of pushing the buttons.

For comfortable, but not really wealthy families, the situation is different. This is a great success. Some may simply see this as a five-year period where they have to sit and wait for a change of government.

Others will use the changes, particularly regarding pensions flowing into their estates, to give money to their children and grandchildren much sooner than they had planned.

As for people in their early careers, the answer will vary. Some will decide to accept that destination abroad, in Dubai, that they were considering. Some will do nothing and cut spending when they can.

The danger, expressed among others by the Institute for Fiscal Studies, is that UK tax revenues will depend on too narrow a base. The top 1 per cent of UK taxpayers (those earning more than £214,000 in 2023-24) pay 29 per cent of all income tax. The top 10 percent pay 61 percent.

That’s scary. It doesn’t take a big change in the behavior of top earners to cause enormous damage to the country’s tax revenues.

I’m sure the Treasury will have done the math on how these people might respond, just as they no doubt made assumptions about how markets would react to the higher borrowing plan. But it’s hard to have much confidence in their judgment.

It will take a few weeks for people, both individually and as managers, to decide what to do.

The sensible response was popularized by US President John F. Kennedy: “Don’t get angry, get even.” Governments must have income. He has decided that he needs more and that this is the best way to raise him.

Let’s see how things calm down in the coming weeks. Let’s see what happens with the gold market. And let’s use this as an excuse to do the financial planning we probably should be doing anyway.