Borrowing costs rise as bond markets brace for Budget turmoil
The cost of government borrowing rose ahead of the Budget amid fears the Chancellor will not take the tough decisions required to put Britain's creaking finances on a stable footing.In early trading on Wednesday, the yield on 10-year gilts – a key measure of how much it costs the government to borrow – rose back above 4.5 per cent to 4.522 per cent.Yields have risen from around 4.375 per cent earlier this month as bond market investors who lend to the UK government fret over Rachel Reeves' plans to plug the gaping hole in her finances.The Chancellor is set to impose another brutal round of tax hikes in the Budget including an extension to the long-running freeze on income tax thresholds.But it is feared tax hikes alone will not be enough to placate the bond markets - with investors calling for spending cuts.
Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management, said 'raising taxes won't translate into material revenue gains as this impairs growth and deters wealth creation'.He added: 'What the bond market would rather see is more action to tackle runaway welfare spending.'Former Bank of England official Andrew Sentance has called for spending cuts of £20billion to £25billion alongside tax rises of £5billion to £10billion.Neil Wilson, UK investor strategist at Saxo, said: 'It's probably the most consequential Budget in a generation. It's make or break for the Chancellor and the embattled Starmer premiership. The litmus test for its success is the bond market reaction.'I see three key questions that will need answering. One, to what extent are tax hikes going to drag on growth, which is antithetical to a self-declared pro-growth chancellor, which diminishes her ability to hit fiscal rules?'Two, to what extent are tax hikes inflationary, which deepens cost of living problems and restricts manoeuvrability of Bank of England to cut rates?'Three, to what degree are forecasts plausible - are they hinged on fiscal restraint in 29/30 that will depend on nebulous welfare reform and spending cuts, the kind of which the govt has signally failed to pass so far?' Rachel Reeves is under pressure to reassure the bond markets her plan will workGilt yields have risen sharply in the past two weeks after Ms Reeves ditched plans to raise the main rates of income tax to shore up the public finances.While such a move was set to be unpopular with voters – and breach the Labour manifesto – it was seen by the bond markets as one of the cleanest ways of raising money.Oliver Faizallah, a bond investor at wealth manager Charles Stanley, said the U-turn 'gave markets the view that the Government is not willing to cause party upset and make difficult decisions'.He added: 'Bond markets will be watching very closely, ultimately being the arbiter as to whether the Chancellor has done enough to put the country's debt on a sustainable path. 'The Budget will lay out the government's plans for how much they will be taxing and spending, and the timeline over which they plan to implement these plans.'Patrick Farrell, chief investment officer at Charles Stanley, added: 'The Chancellor needs to deliver a Goldilocks Budget today – one with just the right balance between supporting growth, preserving fiscal credibility, and not overburdening households or businesses.'It's a tough ask and bond markets could decide Rachel Reeves has served up a dose of cold porridge for taxpayers while not doing enough to tackle a yawning fiscal black hole.'If the fiscal measures are considered too tight, as well as choking off growth, we could see political instability, which would be hard for bond markets to stomach. However, anything too expansionary would risk inflation and unsustainable borrowing.'AJ BellAJ BellEasy investing and ready-made portfoliosHargreaves LansdownHargreaves LansdownFree fund dealing and investment ideasinteractive investorinteractive investorFlat-fee investing from £4.99 per monthFreetradeFreetradeInvesting Isa now free on basic planTrading 212Trading 212Free share dealing and no account feeAffiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.Compare the best investing account for you
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Borrowing costs rise as bond markets brace for Budget turmoil
