Rachel Reeves walking a tightrope with budget - RBC BlueBay
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RACHEL REEVES WALKING A TIGHTROPE WITH BUDGET - RBC BLUEBAY
The days are ticking down to the UK's new budget, with finance minister Rachel Reeves due to reveal the Labour Party's plans for big increases in public spending and tax next Wednesday.
And according to RBC BlueBay's CIO for fixed income Mark Dowding, there is a sense that she is walking a tightrope.
On Thursday Reeves revealed she will change the measure of public debt that the government targets in next week's budget to allow billions of pounds of more borrowing for investment.
Writing in a note, Dowding says such a move suggests fiscal headroom of £62 billion over the next five years.
"...but if the Labour government spends more than GBP20 billion on infrastructure projects, without offsetting tax hikes, then we would worry that this will be too much to absorb," he adds.
Elsewhere, Dowding says fiscal headroom analysis has assumed that interest rates and gilt yields will fall.
"...this will help to reduce the GBP100 billion in annual debt servicing costs, which is now one of the largest line items of government spending. With yields close to their highs for the year, this is already weighing on these calculations."
But he warns that any move upwards in yields could see attempts to free up fiscal headroom evaporate in front of the government's eyes.
"Hence, there is a sense that Rachel Reeves is walking a tightrope, with the memory of the Truss tantrum still fresh in investors’ minds."
All of this would suggest caution, But RBC BlueBay is waiting to see what actually happens next week.
(Lucy Raitano)
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