Rachel Reeves, the chancellor of the Exchequer in Britain, had promised “a budget for economic growth” and “a budget for investment.”
On Wednesday, she announced a sizable increase in public spending — about 70 billion pounds ($90 billion) a year over the next five years. Roughly half of it would be paid for by tax increases, particularly on employers, and the rest through more borrowing. Ms. Reeves also said she would spend £100 billion over the next five years on investment, reversing planned cuts by her predecessor.
But as the dust settled on the Labour Party’s first budget announcement in 14 years, it was clear that the budget included plenty of investment and spending, but there was not much growth.
Big changes in public service spending.
Much of the additional public spending that Ms. Reeves has announced is set to be put in place this year and next, injecting a lot more cash into public services, particularly the National Health Service. There’s also extra money for transportation, education, local government and some other departments.
Ms. Reeves put departments’ day-to-day spending “on a much more realistic, much firmer footing,” said James Smith, the research director at the Resolution Foundation, a research organization.
The cost of that will be felt for some in lower wage growth. Although the Labour Party has promised not to raise taxes on “working people,” most of the increase in taxes for employers is expected to be passed on to employees in smaller salary raises, analysts said.
What does it mean for economic growth?
In short, not a lot.
The extra spending will give the economy a “temporary sugar rush” in the next two years, said Richard Hughes, the chair of the Office for Budget Responsibility, an independent watchdog that assesses the economic and fiscal effects of the government’s spending and tax increases.
From 2026, growth slows down again. The size of the economy will be “largely unchanged” in five years, the watchdog said.
The budget would increase inflation — adding 0.4 percentage points to the headline measure in 2026 — meaning interest rates would fall more slowly, weighing on the economy, the office added.
A bet on investment in Britain.
The government is “betting on public investment as a path to growth,” said Gemma Tetlow, the chief economist at the Institute for Government. But “public investment isn’t good in and of itself; it needs to be channeled and spent efficiently.”
If the investment leads to stronger economic growth, that would improve public finances, allow even more spending on public services and improve the outlook for debt. The Office for Budget Responsibility has said this is possible. Sustained public investment would increase the potential of the economy in the long run.
Bond markets react to the budget.
This week’s announcement has not been a repeat of the debacle that followed the “mini budget” of former Prime Minister Liz Truss two years ago, but bond investors are reacting to it.
Bonds prices are falling, pushing up the yields on the government’s debt, known as gilts. The 10-year bond yield closed on Thursday at 4.45 percent, about 0.14 percentage points higher than on Tuesday, the day before the budget announcement. The pound has also dropped more than 1 percent against the U.S. dollar in the past two days.
“The scars of September 2022 run deep, and the pound has been spooked by speed of the gilt sell-off,” analysts at Bank of America wrote in a note.
But they said that, to some extent, the move in the bond market was explained by investors reassessing the level of future interest rates and preparing to absorb a lot more bond sales.
The government will sell £19 billion more in bonds this fiscal year, and the extra fiscal stimulus could lead to interest rates staying higher than previously expected. Traders will be watching the Bank of England’s response to the budget closely when policymakers meet to set interest rates next week.
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