Reeves ‘will be forced to hold Spring Budget’ to settle gilt jitters, Abrdn predicts
Chancellor Rachel Reeves will be forced to hold a spring Budget this year to rein in government spending and settle investors’ nerves, after the cost of government borrowing hit multi-decade highs this week, Abrdn has predicted.
Despite ministers insisting the gilt market was functioning in an “orderly” way and no emergency measures would be taken, the FTSE 250 investor said it expects Reeves to step in with a Budget in March when the government’s fiscal watchdog publishes new growth forecasts.
Rachel Reeves has previously pledged to hold only one Budget a year.
Abrdn’s warnings come after UK government bond yields surged higher and the pound slumped today as investors fret over the outlook for the UK economy and the prospect of rising inflation this year.
The pound fell below $1.23 against the dollar in early trades today and is currently down 0.7 per cent against the dollar and 0.6 per cent against the euro.
Earlier this week, 30-year government bond yields reached their highest this century and 10-year government yields jumped to 4.82 per cent, the highest since August 2008.
“A long time for the market to speculate with confidence continuing to erode”
While Reeves outlined plans for £70bn of annual spending in October, Matthew Amis, an investment manager at Abrdn, said the volatility showed “investors need confidence” to buy government debt otherwise “gilt yields will continue to move higher and the currency will continue to weaken”.
“The spending review is not due to be delivered until June, that’s a long time for the market to speculate with confidence continuing to erode,” he added. “We ultimately expect to see a Spring budget alongside the OBR forecasts, where she signals greater cuts to government spending.”
Rising gilt yields are expected to have all but wiped out the Chancellor’s fiscal headroom and could lead to the government breaking its self imposed fiscal rules, requiring government spending to be met by tax receipts.
In a note this week, economists at Capital Economics said there was a “significant chance” that the Office for Budget Responsibility (OBR) will judge that the Reeves is on course to miss her main fiscal rule when it revises its forecasts March, potentially paving the way for another series of tax hikes.
“If sustained, the rise in yields since the 30 October Budget could have wiped out the Chancellor’s GBP9.9bn of fiscal headroom,” analysts at HSBC added today. “Unless something changes, more tough choices on tax rises, spending cuts or tearing up the new fiscal targets loom over the 26 March Spring Statement.”
Analysts have likened the tumult to that seen in 1976, when the International Monetary Fund was forced to bailout the UK. Nigel Green, chief executive of advisory firm De Vere Group, described the market reaction as a “brutal throwback”.