The Labour government used its fresh mandate and large majority to push through an unsurprising “Big State” strategy.
This includes wide increases in taxes, albeit less than originally feared, and increased borrowing by over £140bn, or 6 per cent of current GDP more than expected, to fund an increase in public investment, mostly the NHS and schools. Larger borrowing was by and large supported by a generous 2 per cent growth projection.
It would be unfair to suggest that markets were somehow “fooled” by the optimistic growth projection which is necessary to support more borrowing and public spending. Investors are clever enough give more weight to wider economic consensus and international bodies.
It may be more accurate to say that the Chancellor cleverly and methodically prepared investors.The budget was expansive, to be sure, but lack of a disastrous 2022 mini-budget market reaction shows just how far managing expectations can take a government.
This means that, for the time being, investors bought into Ms Reeves’s argument that big public investment is needed to spur high enough growth to ignore the extra borrowing. Higher taxes are a necessary signal that the government isn’t willing to let things get too far just to appease voters.
However, again gauging market reaction which saw much higher yields after the speech was over, it is evident that the leash is quite short. Misquoting Churchill (after Dunkirk), the government should not assign to this reprieve the attributes of a victory.
The importance of fiscal restraint in the age of debt can’t be understated.The country is paying nearly three times its annual growth to debt interest payments. The UK’s debt, especially, can be volatile as a large part of it is inflation-linked. If inflation, which is realistically outside the Bank of England’s direct control, ticks up, interest payments go up immediately.
Debt is to the economy what hypertension is to the human body. The “silent killer”. Never quite making the papers, it increases stresses on the economy, and it may take very little, especially if bond markets are jittery, to cause an economic and financial crisis.
George Lagarias is chief economist of Forvis Mazars
