A top UK government official has explained why the recent Budget presented by Rachel Reeves is “very, very different” from Liz Truss’s mini-Budget of two years ago. Chief Secretary to the Treasury, Darren Jones, aimed to calm investor nerves after a recent budget announcement caused an increase in borrowing costs and a drop in the British pound’s value.

Why Are Borrowing Costs Rising?

This week’s Budget revealed a significant boost in government borrowing to finance projects. While this move could create more opportunities for public services, it has also raised concerns about the government needing to borrow even more money in the future. This has made investors a bit wary, especially after the sharp reactions to the Truss mini-Budget in 2022.

Jones explained that the government now has stricter rules in place. He emphasized that money for essential public services would come from tax revenue, not monthly borrowing, to avoid financial uncertainty. “We’ve all got a bit of anxiety from what happened when Liz Truss was in government,” he said.

To give investors more confidence, Jones assured that these new rules would help keep national debt in check, even as they spend on important projects. He called it a “strong investment rule,” meaning they’re focused on investments that won’t skyrocket debt in relation to the economy’s size.

Understanding Government Bonds and Yields

When the government borrows money, it issues bonds – also called gilts – that investors can buy. These bonds are like loans to the government, and in return, investors get paid interest. The percentage interest the government agrees to pay is known as the “yield.” For instance, if the yield is 4%, it means the government will pay 4% interest to the bondholders.

Recently, the yield on 10-year government bonds rose to 4.52% – the highest level in a year. This signals that investors feel a bit cautious lending to the government, thinking it could be riskier than before. The yield briefly fell to 4.45% the next day, but it was still notably high. When bond yields go up, borrowing gets more expensive, not only for the government but also for everyday loans and mortgages, which can be unsettling for households across the UK.

Why Mortgage Rates Are Affected

David Hollingworth, a mortgage expert, explained how this Budget shift might hit mortgage borrowers. Some smaller mortgage lenders paused offering new loans due to the rate hike, while larger lenders like Skipton and Coventry building societies announced they’d be raising rates soon. This creates a confusing situation for mortgage borrowers, especially since many were hoping the Bank of England would lower interest rates soon.

Hollingworth warned that if market rates stay high, more lenders may reconsider their mortgage options. Borrowers looking at fixed-rate deals should act fast, he said, as some mortgage options are being pulled from the market with almost no notice.

Not as Bad as Truss’s Mini-Budget Shock

The financial market reactions to Reeves’ Budget were calmer than those that followed the mini-Budget introduced by Liz Truss’s finance minister, Kwasi Kwarteng. In 2022, Kwarteng’s announcements led to a dramatic market response: the pound plummeted by 8% against the dollar, hitting an all-time low. The shock this time, though significant, was only a fraction of that. For instance, the pound fell about 0.8% but quickly regained some ground, closing just 0.5% lower by Friday evening.

It’s also worth noting that recent rises in borrowing costs have not been unique to the UK. Over the past month, there’s been a worldwide trend of rising borrowing rates, led by the U.S. financial market.

Rachel Reeves’ Response to Market Reactions

In response to questions about the recent market shifts, Rachel Reeves remained calm, saying that market moves are simply part of the financial landscape. She added that the International Monetary Fund (IMF) approved the Budget, giving it a “clean bill of health.” The Office for Budget Responsibility (OBR), a UK government forecaster, also confirmed that the Budget met financial rules.

The new Budget introduced nearly £70 billion in extra annual spending. The funds will come from increased taxes on businesses and additional borrowing, a combination designed to support various public services.

Investor Concerns About Inflation

Susannah Streeter, who heads the money and markets team at Hargreaves Lansdown, mentioned another reason for investor caution: potential inflation. The new Budget’s spending plans might fuel inflation in the coming years, leading some investors to believe that the Bank of England will be cautious about cutting interest rates anytime soon. They now expect rates to remain above 4% until at least 2026.

Looking Ahead

The recent changes in borrowing rates and currency values reflect both concerns and adjustments as the UK’s economic policies evolve. The government aims to keep spending sustainable, learning from past mistakes, and trying to keep markets stable.

For ordinary UK citizens, however, this means higher costs might be here to stay, at least in the short term. Borrowers may want to keep a close eye on interest rates, especially if they’re considering fixed-rate loans or mortgages.

With stricter rules and a watchful eye on debt, the government’s new approach is a step toward stability, even if it means facing some short-term financial uncertainty. This Budget may not be free from risk, but it shows a careful move away from the financial shock of past policies, attempting to balance investment and stability in the long run.