LONDON (AP) — Worries about this week’s tax-raising U.K. budget within financial markets appeared to ease Friday with the interest rates charged on British debt steadying and the pound rising against most other currencies.
In the wake of Wednesday’s budget statement, the first by a Labour government for 14 years, British financial assets have been choppy, with investors taking a more risk-averse approach by selling both government bonds and the pound.
The budget saw taxes raised by 40 billion pounds ($52 billion), proportionately the biggest for over three decades, and borrowing and spending increased — a combination that clearly unnerved some investors.
Some analysts voiced worries about the potential inflationary impact of the budget, which may prompt the Bank of England to cut interest rates more slowly than previously anticipated. Though the bank is widely expected to reduce its main interest rate next week by a further quarter-point to 4.75%, the markets have moved to price in fewer reductions next year in the wake of the budget.
Other analysts said the public finances will likely need to be bolstered again in coming years if the U.K.’s economic growth doesn’t pick up. The Office for Budget Responsibility, an independent watchdog, said in its assessment of the budget that the measures would do little to boost growth levels over the coming years.
On Friday, the yield, or interest rate, charged on the U.K.’s 10-year bonds held steady at 4.45%, following increases since Treasury chief Rachel Reeves presented the budget. The pound meanwhile was up 0.4% to $1.2951.
Ahead of the statement, Reeves was clearly aware of how a budget can go wrong and prompt panic in financial markets. Two years ago, the short-lived premiership of Liz Truss foundered after a series of unfunded tax cuts sent borrowing costs surging.
“Though the market’s allergic reaction is unwelcome for the new Labour government, the response has been much more muted than after the Conservative’s mini-Budget of September 2022. ” said Andrew Goodwin, chief U.K. economist at Oxford Economics.
The overall increase in taxes announced by Reeves comes in large part from an increase in a tax businesses pay for employing people. The 1.2 percentage-point increase in employers’ national insurance contributions, along with the fact that the levy will be paid on lower incomes, is forecast to raise 25 billion pounds.
Many executives have expressed concern about the move, arguing that it may depress wages by prompting firms to seek a way of absorbing the additional costs.
The center-left Labour Party won a landslide election victory July 4 after promising to end years of turmoil and scandal under successive Conservative governments, get Britain’s economy growing and restore frayed public services. But the scale of the measures announced on Wednesday by Reeves exceeded Labour’s cautious general election campaign.