Financial market concerns about the UK budget appear to be easing

LONDON (AP) — Concerns about this week’s events UK budget raising taxes Financial markets appeared to calm on Friday as interest rates charged on British debt stabilized and the pound rose against most other currencies.

Following Wednesday’s budget statement, the first by a Labor government in 14 years, British financial assets have become volatile and investors have taken a more risk-averse approach, selling both government bonds and the pound.

The budget increased taxes by 40 billion pounds ($52 billion), proportionately the biggest in three decades, and increased borrowing and spending – a combination that clearly unnerved some investors.

Some analysts have raised concerns about the potential inflationary impact of the budget, which could prompt the Bank of England to cut interest rates more slowly than previously thought. While the bank is expected to cut its key interest rate next week by a further quarter point to 4.75%, markets have moved to price a smaller cut next year following the Budget.

Other analysts say public finances may have to be supported again in coming years if UK economic growth does not pick up. The Office for Budget Responsibility, an independent watchdog, said in its assessment of the budget that the measures would do little to boost growth levels in the coming years.

On Friday, the yield, or interest rate charged on UK 10-year bonds, remained steady at 4.45% after rising since Treasury chief Rachel Reeves presented the Budget. Meanwhile, the pound rose 0.4% to $1.2951.

On the eve of his announcement, Reeves was clearly aware that the budget could go wrong and cause panic in financial markets. Two years ago short-lived premiership of Liz Truss collapsed after a series of unfunded tax cuts sent borrowing costs soaring.

“While a market reaction is unwelcome for a new Labor government, the reaction has been much more muted than after the Conservative mini-budget in September 2022,” said Andrew Goodwin, chief UK economist at Oxford Economics.

The overall tax increases announced by Reeves are largely due to increase in the tax that businesses pay for employing people. The 1.2 percentage point increase in employers’ national insurance contributions, and the fact that the levy will be paid on lower incomes, is forecast to raise £25 billion.

Many executives have expressed concern about the move, saying it could lead to lower wages by prompting companies to look for a way to cover additional costs.

The centre-left Labor Party won landslide victory in elections 4 July after promising to end years of turmoil and scandal under successive Conservative governments, boost Britain’s economy and rebuild frayed public services. But the scale of the measures announced on Wednesday by Reeves overwhelmed Labour’s cautious general election campaign.