Chancellor Rachel Reeves seeks to calm markets after Budget borrowing spree

Chancellor Rachel Reeves has been working to reassure the markets and the UK's financial stability following her Budget borrowing spree sparked anxieties. The Budget saw a significant increase in state spending by nearly £70 billion annually—just over 2% of GDP—funded by higher taxes and borrowing.

The substantial additional borrowing, averaging around £32 billion a year, led to a rise in government bond yields as investors reacted to the Chancellor's plans. Despite this, Ms Reeves has downplayed the concerns, stating that "markets will move on any given day" and emphasising her dedication to "economic and fiscal stability".

Paul Johnson director of the Institute for Fiscal Studies (IFS) cautioned that the Budget's "implausibly low spending increases" could mean further tax hikes if the anticipated economic growth doesn't occur. However, speaking to Channel 4, the Chancellor firmly stated she would "absolutely not" impose additional tax rises.

She said: "We have now set the envelope of spending for this Parliament, and we’re going to live within our means." When questioned if she was worried regarding market reactions, Ms Reeves responded: "Markets will move on any given day, but we have now put our public finances on a firm footing with robust fiscal rules."

The IMF has given its nod to the investment and public service spending outlined in the Chancellor’s Budget, along with the sustainable tax rises. For money-saving tips, sign up to our Money newsletter here

In an unexpected move, the Washington-based watchdog stated: "We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue." However, the IMF's verdict did not seem to reassure financial markets.

The yield – or interest rate – on a 10-year gilt, which indicates the cost of state borrowing, reached 4.568% on Thursday afternoon, its highest level since August 2023, while the pound also weakened against the dollar. Read the The key points from Rachel Reeves' budget if you live in Wales.

When asked if she was concerned about a potential "Liz Truss situation", Ms Reeves responded to Bloomberg TV: "The number one commitment of this Government is economic and fiscal stability which is why we put in place yesterday in the Budget robust fiscal rules that we will meet two years early." The Chancellor insisted that the public finances are "on a stable and a solid trajectory", adding: "We have more headroom than the previous government left us, and that is important."

Ms Reeves also acknowledged that her decision to increase national insurance contributions (NICs) for employers could impact wage growth for private sector workers as companies attempt to offset the cost of the tax hike. The main tax increase in the Budget was the £25.7 billion change to employers’ NICs, although the actual amount of money raised for the Exchequer will be around £16.1 billion by 2029/30 as firms curb wage rises, cut hours and reduce profits while public sector employers receive compensation in their budgets for the change.

The recent uptick in national insurance contributions has been described by economic specialists as a "tax on working people" that will inevitably manifest as lower wages. The Office for Budget Responsibility (OBR) suggests that, by the financial year 2026-27, up to 76% of the cumulative cost of the NICs hike could be reflected in diminished real wages, due to subdued pay increases and inflating prices, potentially culminating in around 50,000 jobs lost on average per hour.

James Smith from the Resolution Foundation stated: "This is definitely a tax on working people, let’s be very clear about that. Even if it doesn’t show up in pay packets from day one, it will eventually feed through to lower wages."

Although the OBR projects a fleeting uptick in GDP owing to government spending initiatives, it has downgraded forecasts for the next few years, cautioning that these budget measures are likely to intensify inflation and interest rates.

The NHS received significant financial support in the latest budget, with a notable £22.6 billion boost for operational costs and an additional £3.1 billion aimed at purchasing new equipment and constructing hospitals. Sugar tax on soft beverages will see an increase to reflect inflation, while Treasury policy papers suggest its scope could expand further.

A review is set to consider whether to lower the sugar content threshold at which the tax starts applying and potentially creating a third tax rate for drinks with more than, for instance, 10g sugar per 100ml. It will also look at whether to apply the levy to milk-based and milk substitute drinks, which are currently exempt.

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