Financial analysts caution against investor backlash amid plans for increased public spending

Chancellor Rachel Reeves faces warnings from financial experts about her prospective borrowing plan, which could potentially “spook the markets” and trigger a crisis reminiscent of former Prime Minister Liz Truss’s mini-budget meltdown. The Institute for Fiscal Studies (IFS) has highlighted significant uncertainty surrounding Reeves’s proposed overhaul of the fiscal regime, which aims to unlock £50 billion in additional spending.

Downing Street, however, remains optimistic, asserting it will “absolutely deliver” on its commitment to restore economic stability despite the growing concerns.

Nigel Green, chief executive of the deVere Group, one of the world’s largest independent financial advisory firms, noted a notable rise in UK gilt yields—a key indicator of investor confidence. In the weeks leading up to the anticipated Budget, yields surged from 3.75% to around 4.2%, indicating that investors are offloading government debt. Green explained that this trend reflects increasing worries that the Chancellor may prioritise fiscal stimulus over long-term financial sustainability.

He cautioned, “The response recalls the shockwaves from Truss’s controversial fiscal plan in September 2022, which triggered a massive sell-off of UK gilts, rattling markets and forcing emergency interventions.” Green suggested that unless Reeves approaches her borrowing strategy cautiously, the UK could experience a similar, albeit potentially less severe, panic.

Paul Johnson, director of the IFS, supported these sentiments, emphasising that any plan to borrow billions for infrastructure projects would be “extremely hard and very uncertain.” He pointed out that the government’s actual borrowing capacity is dictated by market conditions and interest rates rather than political aspirations.

The echoes of Truss’s brief tenure as Prime Minister, which was marred by her government’s unfunded tax cuts and subsequent financial turmoil, loom large as the Labour government navigates its fiscal policies. As Reeves prepares for what could be a pivotal Budget, the potential repercussions on investor sentiment and market stability remain a pressing concern.