Chancellor’s pre-Budget speech sends gilt yields lower
Image: Kirsty O'Connor/Treasury
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Rachel Reeves gave a speech on Tuesday morning in which she sought to prepare the public for what is to come in the Autumn Budget this month. Rejecting calls to change her fiscal rules, she said gilts need to remain attractive in financial markets. Her comments have had a slight downward effect on yields.
Ahead of her Budget speech on 26 November, the chancellor said that her policies will be focussed on reducing inflation and creating the conditions for interest rate cuts “to support economic growth and improve the cost of living”.
She said that additional investment “can only be delivered because markets know my commitment to the fiscal rules is ironclad”.
Attacking those who believe that her self-imposed rules are too rigid, she added: “No accounting trick can change the basic fact that government debt is sold on financial markets. There are limits on the price that banks, hedge funds and pension funds are willing to pay for our debt.”
Since her speech, gilt yields have already fallen by 2 to 3 basis points.
Gilts are partly driven by supply and demand, and demand may be what the chancellor meant, rather than price.
Lower yields would lead to lower funding levels among defined benefit schemes. This in turn could slow down the exodus of DB gilt buyers, who have been transferring liabilities to insurers in droves as their funding levels benefitted from higher yields.
Gilt yields rose steadily throughout 2022 and spiked when former prime minister Liz Truss proposed unfunded tax cuts in late September that year, spooking investors. The sudden rise in yields caused a crisis among pension funds with leveraged liability-driven investments that threatened to contaminate other parts of the financial system, prompting the Bank of England to step in as a buyer of last resort.
However, more than about keeping buyers happy, the chancellor’s message was to voters – and perhaps to MPs who earlier this year forced the government into a U-turn on welfare spending – that borrowing comes at a price.
“The more that we try to sell, the more it will cost us. It is important that everyone, the public and politicians, understand that reality. The less we spend on debt interest, the more we can spend on the priorities of working people,” she said.
Ahead of her Budget speech on 26 November, the chancellor said that her policies will be focussed on reducing inflation and creating the conditions for interest rate cuts “to support economic growth and improve the cost of living”.
She said that additional investment “can only be delivered because markets know my commitment to the fiscal rules is ironclad”.
Attacking those who believe that her self-imposed rules are too rigid, she added: “No accounting trick can change the basic fact that government debt is sold on financial markets. There are limits on the price that banks, hedge funds and pension funds are willing to pay for our debt.”
Since her speech, gilt yields have already fallen by 2 to 3 basis points.
Gilts are partly driven by supply and demand, and demand may be what the chancellor meant, rather than price.
Lower yields would lead to lower funding levels among defined benefit schemes. This in turn could slow down the exodus of DB gilt buyers, who have been transferring liabilities to insurers in droves as their funding levels benefitted from higher yields.
Gilt yields rose steadily throughout 2022 and spiked when former prime minister Liz Truss proposed unfunded tax cuts in late September that year, spooking investors. The sudden rise in yields caused a crisis among pension funds with leveraged liability-driven investments that threatened to contaminate other parts of the financial system, prompting the Bank of England to step in as a buyer of last resort.
However, more than about keeping buyers happy, the chancellor’s message was to voters – and perhaps to MPs who earlier this year forced the government into a U-turn on welfare spending – that borrowing comes at a price.
“The more that we try to sell, the more it will cost us. It is important that everyone, the public and politicians, understand that reality. The less we spend on debt interest, the more we can spend on the priorities of working people,” she said.
Will taxes on pensions and savings increase?
The speech is widely seen as preparation for tax rises, perhaps even of one the three main taxes – income tax, national insurance and VAT – which would be breaking Labour’s manifesto commitment not to increase these taxes for ‘working people’.
Maike Currie, vice president of personal finance at provider PensionBee, said: “Rachel Reeves is ripping off the band-aid - albeit slowly and deliberately. By signalling her intent ahead of time, she’s preparing the ground for tough but necessary fiscal choices. This approach sets the stage for what could be one of the most consequential Budgets in recent memory.”
After last year’s extension of inheritance tax to include defined contribution assets, it is unclear if pension tax changes could again be on the cards. There has also been much speculation about other savings vehicles, such as cash ISAs.
Carol Knight, the chief executive of the Investing and Saving Alliance, said: "While we recognise there is clearly a huge strain on the public finances, we urge the chancellor to refrain from reducing the cash ISA limit, which continues to be a very popular means of encouraging consumers to save and build up their financial resilience. We also urge the chancellor to invest in financial education to address rising economic inactivity among young people and to foster a more productive economy that supports the financial and mental wellbeing of our society.”
