Chancellor Reeves needed some sprats to catch those enviable mackerels
10 January 2025, 16:09 | Updated: 10 January 2025, 17:35
- David Buik is LBC's Markets Commentator
When PM Jim Callaghan & Chancellor Denis Healey called in the IMF to bail the country out in December 1976; well that was nothing short of a catastrophe!
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When Liz Truss threw caution to the wind with her wild and unaudited plans for rejuvenating the economy, her audacious plans rattled the cage of the Gilt market, thus adding credence to Labour’s acerbic allegations that Ms Truss trashed the UK economy.
What happened in October 2022 was nothing short of irresponsible crass stupidity.
Many were supportive of her plans to galvanise the economy, but support from the Bank of England and even her own Cabinet was not sought.
However, though the damage inflicted on the economy was measurable to suggest that the economy was trashed was a little wide of the mark.
Chancellor Reeves currently finds herself in a financial bind, some of it not of Labour’s making.
To be fair, international issues such inflation, the cost of energy and geopolitical strife will have taken their toll on many parts of Europe, resulting in very nervous markets, especially bonds and foreign exchange reacting adversely.
The Pound against the Dollar is at a parsimonious $1.22, its lowest level for 3 years.
10-year Gilt-yield 4.85% and 30-year Gilt-yield 5.41% - up from 3.75% and 4.48% respectively since September 2024. The cost of servicing out debt is over £100 billion a year!
The Chancellor had just over £9 billion headroom at the time of the Budget in October 2024, sticking to her own imposed fiscal rules. Now it is about £1 billion.
What is so frustrating is that Messrs Starmer, Reeves and Reynolds had ‘put in the hard yards’ having wooed business and the City that growth was their buzz-word, when taking office.
Sadly, the Chancellor took three months to present her Budget – far too long, laying the Government wide open to speculation and rumour.
When the Budget was presented many were gobsmacked.
There was always going to be a key change in policies focused on public services, such a health, education, care, work and pensions.
Let’s be candid, the public sector is broken; nothing works.
Observers felt that too many decisions taken were political rather than economic. Winter fuel, private school VAT and inheritance tax for farmers were unnecessary and spiteful, raising very little for the exchequer.
As for employers’ National Insurance Contributions, amounting to £25 billion from her Budget, that act of stupidity was just anti-business.
What happened?
Goodwill, confidence and any resemblance of positive sentiment dissipated in a heartbeat.
Investment plans and commitment, so desperately needed to support aspiring businesses and infrastructure projects, much of it has gone on hold.
Companies have lost the appetite for risk.
They cannot see the rewards in the immediate future, which could result in unemployment increasing.
Mrs Reeves needs to provide a few “tasty sprats to catch a few mackerels!” before it is too late.
Opportunities to borrow more money will be limited under current fiscal rules and it should not be forgotten that because the UK borrows cataclysmic amounts, the cost of servicing that debt is double what Germany pays.
Raising taxation is probably inevitable, despite protestations from the Chancellor and her team to the contrary.
Where that increase in taxation may come from will be key – maybe basis rate of income tax above say £35,000 threshold and perhaps fuel duty, which of course is inflationary.
I am not the Chancellor, nor Treasury nor the OBR, but those observations of mine cannot be entirely ruled out.
Chancellor Reeves is currently in Beijing with Governor Andrew Bailey, attempting to drum up service sector trade with China.
No doubt she will be on the airwaves calming trouble financial waters, reassuring the markets that all is well.
What the Chancellor has to do is to acquire some risk appetite, if she wants international investors to come to these shores to support so many innovative businesses.
However, with the current taxation regime why should they, when the US is a far more attractive and fertile hunting ground.
Risk must start at the top of government – no need to be reckless, but if business is prepared to take calculated risks, so must government. Stamp duty on share trading is nonsense.
Regulation is, we understand being cut and that is good news.
There are also great developments in planning, housing and apprenticeships.
However, this is not enough.
The Government must give tax concessions to investors and to SMES to create an environment of growth.
Foundations for business industry and commerce are very solid here in ‘Old Blighty’. What is needed is a change in attitude with some bold action. Chancellor, if you want growth you need to gamble!
In passing, it was necessary for you to go to China.
However, the public wants to hear from the engineer to boost confidence, rather than the oily rag, no offence to Darren Jones.
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David Buik is LBC's Markets Commentator
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