The Chancellor begins a 12-week countdown to the Budget, with Labour’s majority offering scope for spending cuts. Rathbones’s Head of Market Analysis warns the nation’s finances are on thin ice but says the right Budget could prove significant.
Commenting, John Wyn-Evans, Head of Market Analysis at Rathbones, says:
“The reflex these days is to assume the worst. Is the Chancellor only postponing an inevitable disaster in which fiscal rules will be abandoned or manifesto pledges ripped up? That’s certainly possible. But what if the penny has finally dropped that those famous ‘tough decisions’ that the Prime Minister said that only Labour could make, will finally be taken.
“It should be clear to all by now that piling higher taxes onto workers and businesses is ultimately counterproductive. The Government has already attempted to make spending cuts, including on welfare, but these were opposed by its own backbenchers. Perhaps if they are better thought through this time, there is a chance that they will stick, especially if MPs can read the signals from markets.
“It is no consolation that many other countries are in the same boat as us. Look at France, where the Prime Minister has called a vote of confidence as he, too, attempts to cut spending without success. Perhaps he has the excuse of leading a minority government, but Labour still has a huge (theoretical) majority. Spending cuts should be plain sailing.
“This warning message is coming from bond investors, but we are not at a crisis point yet and would push back on scaremongering about the potential for a bailout from the International Monetary Fund. We issue our debt in sterling and print our own currency. There really can be no default, in the traditional sense. An auction of £14bn of 10-year Gilts was well received and heavily oversubscribed this week as investors responded to the higher yield on offer. Sterling remains at the upper end of its post-Brexit trading range on a trade-weighted basis.
“But notice has been given that the country’s finances are on thin ice and that the Chancellor has one chance to stop the rot on 26 November.”
