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UK Prime Minister Sir Keir Starmer has sought to reassure nervous markets that his government will not become addicted to tax and spend after this week’s Budget, as he promised to carry out tough reforms to Britain’s “creaking” state.
Writing in the Financial Times after Labour’s first Budget in 14 years sparked a bond market sell-off, Starmer attempted to dispel fears that he would rely on more tax raises and borrowing to fund public services.
“Just as we cannot tax and spend our way to prosperity, nor can we simply spend our way to better public services,” he said. “That is why reform is an essential pillar of this government’s agenda.”
Starmer and Chancellor Rachel Reeves are making a concerted effort to reassure markets, business and voters that the £40bn tax rise and £28bn of extra annual borrowing in this week’s Budget are not the first of several such increases.
The gilt market steadied on Friday following two days of post-Budget turbulence that pushed long-term government borrowing costs near their highest level since 2008, as investors took fright at the scale of Reeves’ plans.
Reeves has given herself “headroom” to borrow tens of billions of pounds more for capital investment and the Institute for Fiscal Studies has warned taxes could have to rise a further £9bn to avoid real-terms cuts in departmental spending later in the parliament.
Starmer’s article is an attempt to address such concerns, with allies saying the prime minister and the Treasury would work together to force through tough changes to the way the state works.
“The spending envelope is set,” said one ally of the prime minister. “We have brought back stability but now our focus is reform, reform, reform. Departments will have to reform to improve services.”
In a direct pitch to international investors, Starmer said he would also take on “overweening regulators and a dysfunctional planning regime” which he said combined to stop the country building homes, factories and green energy schemes.
The prime minister said the planning reforms were “not yet ready” to be included in official growth forecasts by the Office for Budget Responsibility, but he insisted they would be delivered and would boost the country’s economic potential.
“A ‘big build’ could become as transformative for working people as the ‘big bang’ was for the City of London in the 1980s,” he wrote.
Markets had calmed by the end of Friday’s trading session, with the 10-year gilt yield at 4.45 per cent — below Thursday’s high for the year of 4.53 per cent but still well above the low of 4.21 per cent hit during Reeves’ speech on Wednesday.
Earlier in the day Moody’s warned that the chancellor’s plans for extra debt issuance have made it tougher to deliver on her pledge to repair the public finances.
“In our view the increase in borrowing, which is in part supported by a new measure of debt under the fiscal framework, will pose an additional challenge for what are already difficult fiscal consolidation prospects,” the rating agency said.
Mark McCormick, head of FX and EM strategy at TD Securities, said the week’s jump in bond yields was a sign of the market “rejecting the Budget itself, introducing a new fiscal risk premium into the UK”.
The government had “really tried to push the needle” with its spending and borrowing plans, he added.
However, most investors played down any parallels with the aftermath of Liz Truss’s ill-fated “mini” Budget in 2022, which crashed the pound to an all-time low and sparked a crisis in the gilt market.
Sterling climbed 0.3 per cent against the US dollar on Friday to $1.293, recovering the bulk of Thursday’s losses.
Meanwhile, a BMG Research poll for the I newspaper, conducted after the Budget, put the Conservatives ahead of Labour for the first time since 2021, by 29 points to 28.
Reeves’ Budget has been praised by the IMF and also by Mario Draghi, former head of the European Central Bank, who writes in the FT that it contained “some interesting ideas” on how to boost growth-producing investment.
The former Italian prime minister added: “The UK government has chosen to significantly raise public investment over the next five years and has adopted precise rules to ensure that borrowing is used only to fund this investment.”