Markets attack Rachel Reeves: Sterling and debt sell off as Chancellor desperately tries to reassure jittery traders after Labour’s biggest tax rise ever hits business

Rachel Reeves and her senior finance ministers were forced to go on the offensive for a second day after the Budget amid market unrest and anger among voters.

Wednesday’s decision to raise taxes to raise £40 billion to boost public spending by almost £70 billion a year, with the rest covered by borrowing, has spooked investors.

The scale of the extra borrowing – averaging around £32 billion a year – pushed up government bond yields as the market reacted to the Chancellor’s plans.

Ms Reeves played down the impact, saying “markets will move any day now” and sought to reassure her of her commitment to “economic and financial stability”.

Markets remain spooked by the ‘maxi budget’ today, with the 10-year yield rising sharply in early trading, although still below yesterday’s high. Although sterling recovered slightly in early trade against the dollar, it remains below its pre-budget position.

Her deputy was today forced to distance the situation from that which followed the 2022 mini-budget that sent markets into a tailspin and ended Liz Truss’s premiership after 49 days.

Chief Secretary to the Treasury Darren Jones told Sky News that “markets always react to budgets in the usual way”, adding: “I think we’ve all got PTSD from Liz Truss.”

“Let’s just compare the two different scenarios because they are very, very different: So under Liz Truss, as we’ve seen, they sacked the permanent secretary and ignored the independent Office for Budget Responsibility.

“They announced an unfunded £45 billion tax cut and said it was just the beginning. And then the market went crazy and we all know what happened.

“Completely different than now.”

It was a painful day for the pound, which fell to almost $1.28 against the US dollar, its lowest level since August.

The FTSE 100 index was also hit, with leading housebuilders Persimmon and Taylor Wimpey falling 7 percent each on concerns interest rates could remain high for a long time.

Traders dumped British bonds, known as government bonds, in a sell-off that drew unwelcome comparisons with Liz Truss and Kwasi Kwarteng’s disastrous mini-budget two years ago.

The sell-off, which gained momentum throughout the day, sent the UK government’s borrowing costs to their highest levels in a year, adding to the volatility seen in the early hours of Wednesday’s Budget.

Ms Reeves played down the impact, saying “markets will move any day now” and sought to reassure her of her commitment to “economic and financial stability”.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), warned that the Budget’s “incredibly low spending increases” meant there was a risk taxes would have to be raised again if the economic growth on which Labor is depending does not materialize.

But the Chancellor told Channel 4 she would “absolutely not” go back and raise taxes again.

She said: “We have now set our spending levels for this Parliament and will live within our means.”

Asked if she was worried about the market reaction, Ms Reeves said: “Markets will move at any moment, but we have now put our public finances on a sound footing with sound fiscal rules.”

Groups representing elderly and terminally ill patients have warned of the “malign consequences” of the most left-wing budget in decades.

In Wednesday’s Budget, the Chancellor not only increased the rate of employers’ national insurance but also lowered the wage threshold at which it is paid, meaning more part-time workers will be caught out.

Charities last night became the latest group to warn they face “dire” consequences following a £1.4 billion raid on their budget.

Bosses said they would be forced to cut services, lay off staff or even close as a result of Labour’s tax bomb.

But the Treasury said there would be no exemption for charity employees – even if they work on public sector services, which would not face a tax increase.

And Mr Jones confirmed today that even GPs will not be exempt as they are a private business providing NHS services.

Markets fear the total spend of £162bn will fuel inflation, reducing the likely pace of Bank of England interest rate cuts.

Traders are now betting that there will be another cut this year – expected to happen next week – but that a pre-Christmas December cut is unlikely.

A reduction of two-quarters of a percentage point was expected before the budget was passed.

The scale of additional borrowing needed to implement the Chancellor’s plans is also worrying investors.

That, coupled with the prospect of slower rate cuts, has helped push up government bond yields. Higher gold yields increase government borrowing costs.

Dreary economic forecasts released alongside the budget and a tax raid on businesses also helped dampen investors’ views of the UK.

Yields stood at just 3.75 percent in mid-September but began to rise as the government paved the way to change its debt rules so it could borrow more. When the Chancellor presented her Budget on Wednesday, they were around 4.2 percent.

But yesterday they rose above 4.5%, reaching their highest level in a year and within striking distance of the 4.6% seen after the Trass collapse. However, the yield later fell to 4.4%.

Neil Wilson, chief market analyst at Finalto, said: “Bundles are falling and now sterling is a ‘sell the UK’ deal after this freak budget.

“The government is going to borrow a lot more and spend a lot more; but growth will be worse.

“It’s hard to see the budget as anything other than a disaster for economic growth.”

Suzanne Streeter, head of finance and markets at Hargreaves Lansdown, said: “The initial financial market reaction was bullish, but investors appear to have taken flight after picking the bones of huge tax and spending plans.”

Deutsche Bank experts yesterday made a comparison with the Route mini-budget for 2022.

Ms Reeves’ budget “has £32 billion of unfunded liabilities”, Deutsche Bank said in a note to clients, referring to the additional annual amount that would have to be paid through borrowing.

This meant it was “probably two-thirds of Trass’s mini-budget”.