Opinion Economy Labour’s first Budget is a political and financial winner The verdict of the financial markets is unquestionably positive By Matein Khalid October 31, 2024, 4:16 PM Reuters UK chancellor Rachel Reeves poses with the red Budget box – the market response has been positive To butcher a Churchillian observation about the handful of pilots who saved Britain, if the Labour government lasts for 10 long years, its inaugural Budget will be remembered as its “finest hour” for markets. UK chancellor Rachel Reeves laid out a credible blueprint for economic growth and fiscal discipline while raising taxes to a lesser extent than expected. The Halloween Budget was not scary at all. And contrary to some early judgements, the slight rise in bond yields was well within normal bounds. The first female chancellor in UK history communicated a comprehensive growth template for the British economy to 400 fellow Labour MPs in Westminster with a clarity that has eluded Sir Keir Starmer since he moved into 10 Downing Street in July. The verdict of the financial markets on the Budget is unquestionably positive. Gilt yields fell 12 basis points, in dramatic contrast to the bloodbath that followed the Liz Truss mini-Budget debacle two years ago that earned her the dubious honour of a 44-day tenure as UK prime minister. The timing of the Budget was impeccable, since it was delivered in the same week as a 6 percent plunge in the price of crude oil British equities with a domestic footprint, primarily homebuilders and retailers, rose after the Chancellor’s speech. Sterling remained unchanged against King Dollar and rose against the Euro. The Office of Budget Responsibility (OBR) has maintained its growth forecast for 2025 at 2 percent. This implicitly communicated its confidence in the chancellor’s expansionary policies and net borrowing targets at a time when the EU, Britain’s top trading partner, is mired in recession and political crises in both Paris and Berlin. The relief rally in the debt market was palpable since only £19.2 billion ($25 billion) of additional gilt securities will be sold in the current tax year and issuance will rise to £297 billion ($385 billion), well within the limits of the City’s pre-Budget estimates. This increase in issuance will be funded by tax increases that Labour’s great and good had communicated to the electorate as inevitable after 14-years of Tory mismanagement. Reeves also put the burden of higher taxes on businesses rather than the household sector, which is already burdened with some of the highest tax rates in a generation. The markets had no problem with the £40 billion ($52 billion) increase in taxes or the £72 billion ($93.5 billion) increase in government spending since these metrics were far less than the whisper number speculation in bank dealing rooms and the financial press in London. In any case, Reeves set the agenda and leveraged Labour’s political honeymoon by camouflaging one-third of fresh government spending as investment in an unabashedly expansionary Budget. The biggest danger of Labour’s Budget is that it will stimulate inflation expectations in an economy that has historically been vulnerable to spasms of imported inflation. The timing of the chancellor’s Budget was impeccable, since it was delivered to the House of Commons in the same week as a 6 percent plunge in the price of crude oil, which diminishes near-term inflation risk as Brent is at the bottom of its recent $70-$95 range. However, the Bank of England will be the ultimate judge of the Budget’s contribution to inflation risk and this could have an impact on the Monetary Policy Committee’s propensity to cut the base rate at its next two conclaves. Chancellor Reeves rightly noted: “This government was given a mandate to restore political stability to the economy and begin a decade of national renewal.” It is premature to judge if her inaugural Budget will restore economic stability, let alone guarantee Labour’s hold on power for the next decade. Yet it was crucial that the first Labour Budget of the Starmer era receive a vote of confidence from the City’s bond vigilantes who brought down Liz Truss two years ago. UK faces tech talent drain to UAE as Budget tax rises loom The US bond market faces a winter of discontent UK is ‘actively seeking’ Gulf investors, says trade minister Reeves also used the OBR’s 2 percent real GDP forecast for 2025 to reinforce her claim that her Budget boosted the supply-side potential of the UK economy. The increase in employer contributions to National Insurance is also a deft political move from a government that has just won a mandate from the electorate. The increase in the capital gains tax hits the equity-owning class, but is not so draconian as some Tory pundits had predicted. The sharp increase in taxes on carried interest explains the exodus of top UK fund managers to Switzerland and Dubai when it became clear that Rishi Sunak and the Tories were destined to total defeat in the general election. The abolition of the concept of domicile from the UK tax system is as popular with the electorate as it was inevitable under a Labour government with a vast parliamentary majority. The £3 billion a year earmarked for Ukraine “for as long as it takes” could well be saved if Trump wins the White House. The largest increase in the NHS budget since Covid 19 is both overdue and politically popular. This Budget was a financial and political winner for Labour. Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah