Britain’s new finance minister ramps up taxes in first Labour budget

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LONDON (Reuters) -Britain’s new finance minister Rachel Reeves announced the biggest tax increases in three decades in her first budget, as she accused the Conservatives of leaving public services broken when they lost July’s election after 14 years in power.

Reeves said she would raise taxes by 40 billion pounds ($52.04 billion) a year – much of it falling on businesses – to cover a 22 billion-pound shortfall inherited by her Labour Party.

Britain’s 10-year gilt yield, which had fallen ahead of the budget, hit a session low at around 4.21% and was last down around 10 bps on the day. Gilt yields have risen this month, partly on unease ahead of the budget.

Sterling rose to $1.3021 , reversing the day’s falls. Against the euro, the pound was down 0.3% at 83.39 pence, versus 83.47 pence just before Reeves started speaking .

London’s blue-chip FTSE 100 stock index was down 0.3% on the day, trimming earlier falls. The domestically-focused FTSE mid-250 index jumped over 1.5% and was set for its biggest one-day gain since July, while UK bank shares climbed 0.4%.

COMMENTS:

LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER INVESTORS, LONDON:

“What will delight the Chancellor is the financial market reaction. There were fears that stock and bond markets would not react favourably to the announcements today and the loosening of fiscal rules. But for now, gilt yields are down and there is no sign of a repeat of the mini-budget from 2022.”

“What now needs to be delivered is economic growth if the recovery in both the public finances and the wider economy is to take place. Whilst re-defining fiscal rules to take account of investment returns is not unreasonable, the timing of it is a direct result of the clear fiscal pressure facing this government.”

“Guard rails appear sensible and subject to independent oversight. However with businesses historically providing around 80% of investment, the big question is whether corporate profitability will be weakened that they no longer wish to hold up their end of the bargain to such an extent.”

ADRIAN GOSDEN, UK EQUITIES FUND MANAGER, JUPITER ASSET MANAGEMENT:

“UK Chancellor Rachel Reeves has delivered a tough but fair budget, much of which was already expected as it had been leaked to the market. Sterling is just a little weaker and the cost of government debt fell during her speech. The UK is open for business.”

MICHAEL BROWN, MARKET STRATEGIST, PEPPERSTONE, LONDON:

“The outlook for UK assets remains a poor one. While gilts have taken the budget in their stride, and Reeves has avoided a Truss-esque market meltdown, the OBR’s (Office for Budget Responsibility) latest forecasts paint a grim picture of sticky high inflation, and stubbornly low economic growth, well below Labour’s desire for 2.5% annual real GDP growth.”

“Consequently, gilts are likely to continue to lag developed market peers, while headwinds facing the pound are likely to remain relatively stiff, amid continued, and apparently structural, economic underperformance, particularly when compared to the U.S.”

“The BoE must now walk a tightrope, with stagflation becoming an increasingly bigger risk, particularly if today’s measures cause a further decline in both consumer and business sentiment, which has already tumbled in recent months. While a 25 bps cut in November remains nailed-on, a rapid pace of further easing beyond then could well be in doubt, given the cost increases baked in today’s budget.”

THIERRY WIZMAN, GLOBAL FX & RATES STRATEGIST, MACQUARIE, NEW YORK:

“It’s difficult to take everything in at once, but it seems that the early reaction so far probably justifies Reeves’ behaviour in recent weeks.”

“We already had heavy leaking of the budget. We had pessimism over it when it was fist announced. We had plenty of warnings about tough decisions and when it comes out finally, nothing is shocking. If there was something shocking you would see an adverse market reaction.”

MICHAEL METCALFE, HEAD OF MACRO STRATEGY, STATE STREET GLOBAL MARKETS:

“Given that there had been a focus in markets and the media about fiscal sustainability, and also because the IMF is talking about this theme, it’s interesting it’s been a relatively positive reaction to the budget.”

“The potentially difficult bits of the budget, because they were well flagged, have been priced in. There does seem to be a narrative about taking the deficit seriously so that is being viewed positively.”

“This was always going to be difficult balancing act for gilts but it looks like we’ve got through that.

“So, what does this mean for the Bank of England? There might have been a question of whether there would be more stimulus and the fact that there isn’t, seems to open the way up for rate cuts.”

ABBY GLENNIE, MANAGER OF THE ABRDN UK SMALLER COMPANIES FUND, EDINBURGH:

“The government did not quite throw in the hand grenade for AIM (formerly the London Stock Exchange Alternative Investment Market) entrepreneurs and investors that many expected – and valuations of AIM companies ticked up immediately after the announcement, supported by buying demand.”

“However, inheritance tax applied on AIM assets at 20% still makes investing in the market less attractive than previously.”

KATHLEEN BROOKS, RESEARCH DIRECTOR, XTB, LONDON:

“Overall, this budget is not as bad as expected on the tax front. The capital gains tax increase is lower than expected, which suggests that Reeves’ bite is not as bad as feared.”

“However, the unexceptional growth forecasts from the OBR, may be higher than the BOE’s rate, but it does not suggest that the UK’s economy will expanding at a rate anything like the level that the US is expanding, in the coming years.”

“At this stage, massive tax rises have not spooked financial markets, and instead expectations that the budget deficit will shrink is having a mollifying effect on UK bonds.”

LOU BRIEN, MARKET STRATEGIST, DRW TRADING, CHICAGO:

“The key to the Chancellor’s UK budget presentation is the reaction of the gilts. A significant decline in 10-year yield demonstrates that the budget passes the ‘Truss test”, indicating the market, at the very least, sees the plan as reasonable.”

“There can be discussions about the details, but the record tax rise of 40 billion pounds is probably a good sign that Labour’s return to power will not be marked by an irresponsible accounting of cost and revenues. Not yet anyway.”

($1 = 0.7686 pounds)

(Reporting by the Reuters Markets Team; Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)