Bond investors call on Britain’s Reeves to double fiscal buffer.
Investors overseeing more than US$5 trillion in assets are urging British finance minister Rachel Reeves to double the size of the country’s financial buffer against economic shocks in her Nov 26 budget.
Amundi, Europe’s largest asset manager, AXA Investment Managers, Allianz Global Investors and Franklin Templeton want Reeves to increase the fiscal headroom she leaves herself to meet her budget rules to around £20 billion (US$27 billion). Three of them said raising income tax for the first time since the 1970s was the best way to achieve this.
Reeves on Tuesday did not rule out such a tax hike, but one is not guaranteed, given the likely political damage of breaking an election pledge to keep major tax rates unchanged.
Nevertheless, investors said failing to increase the amount of spare room between the government’s spending plans and its self-imposed targets — which gives it fiscal flexibility and credibility — would risk Reeves needing to raise taxes for the third time running next year.
That would damage Britain’s standing in bond markets, which remains vulnerable even after its borrowing costs posted their biggest monthly drop in nearly two years in October, as inflation pressures ebbed.
Signs the Labour government is taking fiscal consolidation seriously have also helped, but Reeves cannot take for granted that markets will stay on her side, with the memory of the opposition Conservatives’ 2022 mini-budget crisis still fresh.
Reeves’ fiscal rules include one where non-investment spending must be matched by tax revenue by 2029-30, and another where public sector net financial liabilities must fall as a share of gross domestic product.
To meet these rules, she needs to find £20 billion to £30 billion of savings, according to various estimates from economists.
The historically slim £9.9 billion of headroom she left herself in 2024 after hiking taxes by £40 billion has been more than wiped out. That is due to higher borrowing costs, a U-turn on welfare cuts under pressure from Labour lawmakers and an expected downgrade of over-optimistic productivity forecasts by the government’s budget watchdog.
Doubling the headroom would help prevent this from happening again, investors said.
Reeves is expected to freeze income tax thresholds, but that would only raise £8 billion, well short of what she needs to fill the fiscal hole, let alone increase headroom.
David Zahn, the head of European fixed income at Franklin Templeton, which manages US$1.5 trillion in assets, said the government would likely need to hike the main income tax band.
A one percentage-point increase there would raise £8 billion a year, versus £2 billion and £230 million from the higher and top rates, the government estimates.
Source: Theedgemalaysia
