Financial market concerns about the UK budget appear to be easing

LONDON – Concerns for this week the UK budget for tax increases financial markets appeared to ease on Friday with UK debt interest rates stabilizing and the pound rising against most other currencies.

Following Wednesday’s budget statement, the first by a Labor government for 14 years, British financial assets were jittery as investors took a more risk-averse approach, selling both government bonds and sterling.

The budget saw taxes rise by 40 billion pounds ($52 billion), the biggest proportionally in more than three decades, and borrowing and spending increased – a combination that clearly unsettled some investors.

Some analysts have expressed concern about the potential inflationary impact of the budget, which could lead the Bank of England to cut interest rates more slowly than previously anticipated. While the bank is expected to cut its main rate next week by another quarter of a point to 4.75%, markets have priced in fewer cuts next year following the Budget.

Other analysts said public finances would likely need to be shored up again in the coming years if UK economic growth did not pick up. The Office for Budget Responsibility, an independent watchdog, said in its assessment of the budget that the measures would not do much to boost growth levels in the coming years.

The yield, or interest rate, on UK 10-year bonds held steady at 4.45% on Friday, after increases since Chancellor of the Exchequer Rachel Reeves presented the budget. Meanwhile, sterling rose 0.4% to $1.2951.

Before the statement, Reeves was clearly aware of how a budget can go wrong and cause panic in financial markets. two years ago the short-lived Prime Minister of Liz Truss collapsed after a series of unfunded tax cuts drove up borrowing costs.

“While the market’s allergic reaction is not welcome to the new Labor government, the response was much more muted than after the Tories’ September 2022 mini-budget,” said Andrew Goodwin, chief economist at Oxford Economics.

The overall tax increase announced by Reeves comes mostly from o increasing the tax that businesses pay for hiring people. The 1.2 percentage point increase in employers’ National Insurance contributions, together with the fact that the tax will be paid on lower incomes, is estimated to raise £25 billion.

Many executives have expressed concern about the move, arguing it may depress wages, prompting firms to look for a way to absorb the extra costs.

The centre-left Labor Party won a landslide electoral victory July 4, after promising to end years of turmoil and scandal under successive Tory governments, boost Britain’s economy and restore damaged public services. But the scale of the measures announced by Reeves on Wednesday went beyond Labour’s cautious election campaign.