Why it’s unfair to compare today’s market movement to Truss’ catastrophic mini-Budget

Interest rates on loans have risen in the aftermath of Rachel Reeves‘ Budgetwhich reached a one-year high on the bond market, led to tense comparisons with the September mini-budget two years ago, which brought an end to the former prime minister Liz Truss‘s political career.

But today’s move is small in comparison. Not only that, but news has emerged that could explain some of the bond market fears.

Yields on 10-year UK government bonds are now 4.48 percent, compared to about 4.24 percent just before Mrs. Reeves presented her budget, an increase of just under a quarter of a percentage point.

Holders of UK government bonds sold some of them, causing bond prices to fall, meaning the amount of interest they earn rises.

The shift has been less dramatic than that which followed Ms Truss’s mini-Budget disaster, says Hal Cook, senior investment analyst at stockbroker Hargreaves Lansdown.

“In what was a huge move, the yield on 10-year government bonds rose from about 3.3 percent a few days before that mini-budget, to about 4.5 percent a few days after.”

More recently, bond yields have risen since mid-September, he said. “There are a few reasons for this, and the impending budget is one of them. The uncertainty surrounding this particular budget had made bond investors nervous, with expectations of higher future borrowings in particular dampening sentiment on the attractiveness of UK government bonds.”

Moreover, it emerged today that the government spending watchdog, the Office for Budgetary Responsibility, miscalculated the amount of headroom Ms Reeves would buy herself if she switched to a new measure of government debt.

Ruth Gregory, deputy chief UK economist at Capital Economics

An estimate of £62 billion in March was an “error”, according to a footnote first spotted by Bloomberg, and the actual figure was £18 billion lower, leaving markets wondering whether this made finances too tight for Ms Reeves.

As well as the OBR’s error and the modest nature of the rise in debt levels, there are numerous other differences between this week’s budget and Mrs Truss’s.

The market went wild because Ms Truss planned to use debt to pay for tax cuts and hoped they would lead to a growth spurt – the details of her plan were not explained. She also claimed that her plan could be implemented without cuts in government spending, which few economists agreed with.

The International Monetary Fund openly criticized Ms Truss’s plans, while welcoming Ms Reeves’ budget. Both were seen as unusual steps for the UN agency.

In the days following Ms Truss’ budget, she came under increasing pressure to resign. She hoped that the fall of her chancellor Kwasi Kwarteng on his sword would save her, but she ultimately quit a month later after pressure from her MPs.

A week before her resignation, the Daily star The newspaper asked if she could survive a lettuce. She couldn’t.

Polls at the time showed a lead for Labor of no less than 36 points, leaving her Conservative party with only 22 seats in parliament.

It also plunged the pound, with the pound at one point approaching the value of just one dollar.

The rapid rise in interest rates has turned the mortgage market upside down, ruining thousands of people’s home-buying plans and increasing borrowing costs by billions.

The turmoil has also wiped out £425 billion in pension valuations by 2022, according to a report this year by the pensions regulator. Some pension funds that invested heavily in government bonds also gambled on low interest rates. They were forced to sell those debts, further driving up returns. They eventually recovered after help from the Bank of England.

Ruth Gregory, deputy chief UK economist at Capital Economics, said: “The market impacts of Wednesday’s Budget are a far cry from the mini-Budget episode of 2022. While we cannot fully discount the possibility of rapid rises in government bond yields, could rule out a self-reinforcing cycle of further price declines, we don’t think this is the start of a new Liz Truss scenario.”

It is also widely acknowledged that Ms Reeves’ hand has been somewhat forced by the mess she inherited from the previous government. The Office for Budgetary Responsibility said the previous government had spent an additional £9.5 billion at the start of the year, which “was not disclosed to the OBR”.

However, the higher debt levels will be unwelcome news for Ms Reeves. On Britain’s £2.69 trillion debt, a quarter of a percentage point increase in borrowing costs implies additional interest costs of £6.7 billion per year. In practice, the cost of debt is fixed when the bonds are sold, but if higher interest rates continue, it will cost taxpayers more if more debt is issued.

Ms Reeves also played down the impact, saying “the markets will move every day” and sought to offer reassurance about her commitment to “economic and fiscal stability”.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), had warned that the budget’s “unbelievably low spending increases” meant taxes would likely have to rise again if Ms Reeves’ growth plan fails.

But the Chancellor told Channel 4 she would “absolutely not” go back to raising taxes again.