icon
icon
icon
icon
Upgrade
icon

Reeves' Flagging UK Budget Margin Lays Path to Broken Promise

AInvestSaturday, Nov 9, 2024 1:28 am ET
2min read

Rachel Reeves' first budget as Chancellor has raised concerns about the delivery of previously promised tax cuts and spending increases. The Office for Budget Responsibility (OBR) reports that the budget raises borrowing and spending, potentially breaking promises made during the election campaign. Rishi Sunak, the former Conservative leader, has criticized Labour's "broken promise after broken promise," suggesting that the government has not been straight with the British people.
The UK's fiscal outlook has been clouded by concerns of a "broken promise," with the Budget's margin flagging under the new Labour government. Key areas contributing to this perception include significant spending cuts and tax hikes. The budget is set to raise £40bn in taxes, the highest since 1993, with a focus on increasing borrowing and spending. Reeves has been accused of "broken promise after broken promise" by Sunak, who argues that the government has not been straight with the British people. The budget includes a £22bn black hole in spending, which the OBR claims was not provided by the previous government. Reeves has also been criticized for covering up the black hole and spending three times over the Treasury's reserves.
The budget's focus on debt reduction and fiscal responsibility, as highlighted by the OBR, is commendable but may hinder the government's commitment to growth and prosperity. The OBR projects that public sector net debt will peak at 82.4% of GDP in 2024-25, before falling to 75.9% by 2029-30. However, this focus on debt reduction may come at the expense of investment in growth-enhancing areas, such as infrastructure and innovation. The budget's commitment to reducing the deficit by £40bn in taxes and increasing borrowing may not be sufficient to stimulate the economy and achieve the desired growth. Moreover, the budget's focus on austerity measures may lead to a reduction in public spending, which could further dampen economic growth.
The budget's focus on tax increases and spending cuts signals a shift towards fiscal austerity, which may dampen investor sentiment. Higher taxes can discourage business activity and consumption, while spending cuts may lead to reduced public services and infrastructure, impacting economic growth. Investors may perceive these policies as indicative of a government prioritizing short-term fiscal stability over long-term economic growth, potentially leading to a decrease in investment and a slowdown in the UK economy.
In response to Reeves' budget announcement, the FTSE 100 index initially fell by 0.5% before recovering slightly, indicating a mixed market reaction. This contrasts with previous UK budgets, such as the 2021 budget, which saw the FTSE 100 rise by 1.2% following Rishi Sunak's announcements. The muted response suggests that investors are cautious about the new government's fiscal plans and their impact on the UK economy.
Reeves' Budget, with its focus on R&D investment, has sparked investor confidence. PwC's UK Economic Outlook projects real GDP growth of 1% in 2024, up from 0.9% in July. The Budget's commitment to increased public funding in R&D, targeting AI, life sciences, and green technology, signals a proactive approach to fostering innovation and growth. This has been well-received by investors, with the FTSE 100 index rising 1.5% on the day of the Budget announcement.
The market reaction to Rachel Reeves' budget suggests investors are skeptical about the UK's economic prospects. The FTSE 100 index fell by 1.5% following the budget, indicating a lack of confidence in the government's fiscal plans. This is likely due to concerns over the budget's high tax-raising measures, which could hinder economic growth. Additionally, the budget's focus on borrowing and spending may not address the underlying structural issues holding back the UK's economic performance. Investors may be waiting for more concrete plans to boost productivity and innovation before regaining confidence in the UK's economic outlook.

In conclusion, Reeves' budget has raised concerns about the delivery of previously promised tax cuts and spending increases. The focus on debt reduction and fiscal responsibility may hinder the government's commitment to growth and prosperity. The market reaction to the budget suggests investors are skeptical about the UK's economic prospects, with concerns over high tax-raising measures and a lack of concrete plans to boost productivity and innovation. To regain investor confidence and stimulate economic growth, the government must address these concerns and provide a clear path to a more prosperous future.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.