Rachel Reeves has been urged to cut spending to reassure investors she has a ‘credible’ plan and stave off a meltdown on financial markets.
As the Chancellor puts the finishing touches to her Budget, fears are mounting that she will rely on an array of tax rises rather than controls on public expenditure to make her numbers add up.
Analysts warned this could spark a backlash on jittery bond and currency markets – sending gilt yields soaring and the pound tumbling.
One analyst even suggested the UK could see ‘season two of the mini-Budget crisis’ unfold in a repeat of the carnage under Liz Truss in 2022.
The Chancellor is thought to be looking to plug a black hole of about £30billion – with most of the heavy lifting set to be done by tax rises.
But Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management, said ‘raising taxes won’t translate into material revenue gains as this impairs growth and deters wealth creation’.
He added: ‘What the bond market would rather see is more action to tackle runaway welfare spending.’
Former Bank of England official Andrew Sentance said £20billion to £25billion of spending cuts would be required, alongside tax rises of £5billion to £10billion.
Writing for the Daily Mail, he said cuts of this level amounted to less than 2 per cent of spending, adding: ‘That should not be a major challenge for well-run government departments.
‘There might be howls of protest from the Labour backbenches, but the Chancellor should not be deflected by this.’
CBI chief Rain Newton-Smith said ‘hard choices’ were required to kick-start the economy amid deepening despair in British boardrooms over Labour’s handling of the economy.
And one FTSE 100 chief executive told the Mail: ‘This Government is completely incapable of taking tough decisions on spending.’
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said the pound could fall below $1.30 this week, warning that the ‘Fifty Shades of Taxes’ being discussed would be a ‘disaster’ for the economy.
She said the UK could see ‘season two of the [Liz Truss] mini-Budget crisis unfold later this week’ if Reeves leaves financial markets disappointed.
Matthew Ryan, at Ebury, warned that gilt yields will soar ‘should Reeves beef up government spending and unveil broad-based tax increases while failing to provide a clear plan as to how fiscal sustainability can run alongside a growing economy’.
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