UK Prime Minister Sir Keir Starmer has aimed to allay concerns in the financial markets regarding potential over-reliance on increasing taxes and spending following the recent Budget announcement. He assured that his administration plans to implement significant reforms to improve the functional state of Britain’s government. In a Financial Times article, Starmer responded to apprehensions stemming from Labour’s first Budget in 14 years, which led to a sell-off in the bond market.
Starmer stated, “Just as we cannot tax and spend our way to prosperity, nor can we simply spend our way to better public services,” emphasizing that reform is crucial to the government’s strategy. Alongside Chancellor Rachel Reeves, Starmer is striving to convince markets, businesses, and the electorate that the £40 billion increase in taxes and the additional £28 billion annual borrowing outlined in the Budget are not indicative of a series of similar measures.
The gilt market stabilized on Friday after experiencing two days of turbulence post-Budget, which had elevated long-term government borrowing costs to levels nearing their highest since 2008. This reaction was due to investor concerns over the extent of Chancellor Reeves’ plans. Reeves has sought “headroom” to enable further borrowing for capital investments, but the Institute for Fiscal Studies has warned that taxes may need to rise by an additional £9 billion to prevent real-term cuts in departmental spending later in the parliamentary term.
Starmer’s article serves to address these concerns, with associates indicating that the government and the Treasury are collaborating to enforce substantial changes to the state’s working methods. An ally of Starmer remarked that with stability restored, the focus is now on reform across departments to enhance services.
Addressing international investors directly, Starmer identified “overweening regulators and a dysfunctional planning regime” as obstacles to building homes, factories, and green energy initiatives. Though planning reforms are not yet incorporated into the Office for Budget Responsibility’s official growth forecasts, Starmer highlighted their future delivery and potential positive impact on the country’s economy.
By the close of trading on Friday, market conditions had improved, with the 10-year gilt yield reaching 4.45 percent—down from the year’s peak of 4.53 percent on Thursday but still higher than Wednesday’s low of 4.21 percent during Reeves’ speech.
Earlier, Moody’s issued a warning that the chancellor’s additional debt plans could complicate the government’s efforts to repair public finances. The rating agency noted that increased borrowing poses an additional challenge to fiscal consolidation prospects.
Mark McCormick, head of FX and EM strategy at TD Securities, interpreted the rise in bond yields as the market’s rejection of the Budget, which introduced a new fiscal risk premium to the UK. He noted the government’s ambitious spending and borrowing proposals.
Most investors, however, deemphasized the parallels with the aftermath of Liz Truss’s “mini” Budget in 2022, which significantly devalued the pound and triggered a gilt market crisis. Sterling rose by 0.3 percent against the US dollar on Friday, reversing most of Thursday’s losses.
In a BMG Research poll conducted for the I newspaper after the Budget, the Conservatives reclaimed a slim lead over Labour for the first time since 2021, at 29 to 28 points. The Budget received praise from the IMF and former European Central Bank head Mario Draghi, who commended its innovative approaches to enhancing growth-focused investment in an article for the Financial Times. The former Italian prime minister noted that the UK government has committed to substantially increasing public investment over the next five years with strict rules ensuring borrowing is allocated specifically for this purpose.
