Labour’s Budget Full of Economic Woe

In a speech delivered inside 10 Downing Street following Labour’s 4 July general election victory, Keir Starmer declared that growth and wealth creation were his government’s top priorities yet new Chancellor Rachel Reeves replaced a picture in her 11 Downing Street office of former Chancellor Nigel Lawson for Ellen Wilkinson, one of the founding members of the Communist Party of Great Britain, signalling a potential shift in priorities.

Last Wednesday, after weeks of speculations amid doom-laden talk of ‘tough choices’ and ‘difficult decisions’ we finally got Labour’s first Budget for 14 years.

In short, its austerity, but just for the wealth creating private sector. The public sector continues to expand without reform and is now funded by an additional ￡170bn in new borrowing and ￡40bn in higher taxes imposed on the private sector despite public sector productivity having barely budged since 1997 according to the ONS (Office for National Statistics).

This Budget marks the largest tax increase in British history, with significant changes to capital gains, stamp duty, inheritance tax, and non-dom status, which many perceive as discouraging to investors, entrepreneurs, and wealth creators.

Consequently, the Pound Sterling and the stock market slumped whilst the yield on the UK Government’s benchmark 10-year bonds climbed to their highest level in 12 months as the markets took in the Budget news.

The DMO (Debt Management Office) said that gilt issuance was likely to reach ￡300bn in 2025, up from the previous estimate of ￡278bn and the second largest figure on record.

The OBR (Office for Budget Responsibility) said the Budget measures are likely to push up inflation and slow the pace of interest rate cuts.

Currency Exchange Rates Update

After the Budget, the Pound fell against all its major currency peers hitting a 4-week low against the Euro and a 10-week low against the Dollar before making something of a recovery on Friday.

What’s in the news?

UK

Chancellor Reeves faced criticism for allegedly being unaware of a ￡22 billion "black hole" in the government's finances, despite pre-election briefings.

The Bank of England’s next interest rate decision is due this Thursday, 7 November.

Even before the Budget, a poll showed that Keir Starmer has suffered the biggest fall in approval rating after winning an election of any prime minister in the modern era.

Not so good news

Credit ratings agency Moody’s said the Budget plan to rewrite fiscal rules and borrow more could jeopardise the stability of Britain’s public finances, leaving little flexibility to manage economic shocks. Moody’s also warned that economic growth is likely to remain weak, predicting only 1.7% growth from 2025 to 2027.

The OBR said workers will bear the brunt of tax rises as it is “likely” businesses will limit wage increases after the Budget saw business levies increase. In its latest set of forecasts, the OBR says, “From 2026-27 onwards, we assume … that 76% of the total cost is passed through lower real wages”.

Meanwhile, care homes and GPs surgeries have demanded that Rachel Reeves exempt them from the changes in employers’ National Insurance (NI) contributions, warning of a “monumental” impact on the sector.

USA

The US economy grew by an annualised rate of 2.8% in the third quarter, powered by strong consumer spending and business investment but added just 12,000 jobs in October as hurricanes and the Boeing strike hit the labour market. It’s by far the weakest jobs report of the Biden administration just days ahead of the Presidential election tomorrow, 5 November.

The US election campaign has shown that reductions in the Federal deficit rank low in politicians’ priorities with both candidates saying little about deficit reduction and both have made promises that only seem to add to the deficit. The US Federal debt level is close to 100% of GDP and projections show that it is set to move significantly higher.

Donald Trump will unleash “all-out war” on Sir Keir Starmer if he returns to the White House according to senior Conservative figures who have been in contact with the former US President’s campaign team.

The Trump campaign has lodged a complaint with the US elections watchdog over “illegal foreign national contributions” after it emerged that Labour’s head of operations, Sofia Patel, asked party staffers if anyone would be willing to travel to the US to “help our friends across the pond elect their first female president”.

Overall inflation in the US has fallen to 2.1%, the lowest since early 2021 and just above the central bank’s 2% goal. However, the Federal Reserve’s preferred measure posted its biggest monthly gain since April, bolstering the case for a slower pace of interest rate cuts following last month’s 0.5% reduction.

The Federal Reserve announce their next interest rate decision on Thursday, 7 November, just two days after the US Presidential elections.

The EU

Eurozone annual inflation rose from 1.7% to 2% whilst the eurozone economy grew 0.4% in the third quarter.

It’s crunch time for French ex EU / Brexit negotiator PM Michel Barnier as he struggles to get his budget approved on 19 November. Moody’s reduced their outlook for the French economy from Stable to Negative last week. If Barnier fails to get his minority government’s budget passed, the government will fall and trigger another general election.

Others

The price of Gold climbed to yet another record, boosted by ‘safe haven’ demand ahead of the US Presidential election.

Quote

Nelson Mandella “It always seems impossible until it’s done.”