Why it’s unfair to compare current market movement to Truss’s mini-Budget disaster

Borrowing rates have risen in the aftermath of Rachel Reeves’s Budget, hitting a one-year high in the bond market and prompting strained comparisons with the mini-Budget in September two years ago which ended former prime minister Liz Truss’s political career.

But today’s move is minor by comparison. Not only that, but news has emerged which may explain some of the bond market’s fears.

Yields on 10-year UK bonds are now at 4.48 per cent, compared to about 4.24 per cent just before Ms Reeves delivered her Budget, a rise of just under a quarter of a percentage point.

Holders of UK government debt sold a chunk of it, sending bond prices falling, which means the amount of interest they yield rises.

The shift has been less dramatic than that following Ms Truss’s 2022 disaster, said Hal Cook, senior investment analyst at stockbroker Hargreaves Lansdown.

“In what was a huge move, the 10-year gilt yield moved from around 3.3 per cent a couple of days before that mini-Budget up to around 4.5 per cent a couple of days after it.”

More recently, bond yields had been rising since mid-September, he said. “There are a few reasons for this, and the looming Budget has been one of them. The uncertainty surrounding this specific Budget had made bond investors nervous, with expectations of higher future borrowing in particular weighing on sentiment towards the attractiveness of UK government debt.”

On top of this, it emerged today that the government spending watchdog, the Office for Budget Responsibility (OBR), got its sums wrong on how much wiggle room Ms Reeves would buy herself when she switched to a new measure of the nation’s debts.

A March estimate of £62bn was an “error”, it said in a footnote first spotted by Bloomberg. The true figure was £18bn lower, leaving markets wondering if this made finances too tight for Ms Reeves.

As well as the OBR’s error and the modest nature of the debt cost rise, there are myriad other differences between this week’s Budget and that of Ms Truss.

The market went wild because the former prime minister planned to use debt to pay for tax cuts and hoped they would lead to a spurt of growth – the details of her plan were not explained. She also claimed that her plan could be executed without any government spending cuts, which few economists agreed with.

The International Monetary Fund openly criticised Ms Truss’s plans, while it welcomed this week’s Budget. Both were noted as unusual moves for the UN agency.

In the days after Ms Truss’s Budget, she was put under increasing pressure to resign. She hoped having her chancellor Kwasi Kwarteng fall on his sword would save her but quit a month later after pressure from her MPs.

A week ahead of her resignation, the Daily Star asked if she could outlast a lettuce. She could not.

Polling at the time showed a lead for Labour of as much as 36 points, which would have left the Conservative Party with as few as 22 seats in parliament.

She also tanked the pound, with sterling at one point approaching a value of just one dollar.

The rapid rise in borrowing rates upended the mortgage market, ruining the homebuying plans of thousands and adding billions to borrowing costs.

The turmoil also wiped £425bn off pension valuations in 2022 according to a report this year by the pensions regulator. Some pensions invested heavily in government debt also made bets on low yields. They were forced to sell that debt, sending yields soaring further. They eventually recovered after help from the Bank of England.

Ruth Gregory, deputy chief UK economist at Capital Economics, said: “The market fallout from Wednesday’s Budget is a long way from the 2022 mini-Budget episode. While we can’t completely rule out the possibility of rapid rises in gilt yields triggering a self-reinforcing cycle of further price falls, we don’t think this is the start of another ‘Liz Truss’ scenario.”

It has also been broadly acknowledged that Ms Reeves had her hand somewhat forced by the mess she inherited from the last government. The OBR said that the previous government had spent an extra £9.5bn in the early part of the year which was “not disclosed to the OBR”.

The higher debt costs will be unwelcome news for the chancellor, however. On the UK’s £2.69 trillion of debt, a quarter percentage point rise in borrowing costs implies an extra interest cost of £6.7bn a year. In practice, debt costs are fixed when the bonds are sold but if the higher yields stick, it will cost the taxpayer more when more debt is issued.

Ms Reeves also played down the impact, saying that “markets will move on any given day” and sought to offer reassurance of her commitment to “economic and fiscal stability”.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), had warned that the “implausibly low spending increases” in the Budget meant taxes would probably have to rise again if Ms Reeves’s growth plan backfires.

But the chancellor told Channel 4 she would “absolutely not” come back and raise taxes once again.