Why is it unfair to compare the current market movement with Truss’ disastrous mini-budget?

Loan interest rates have increased in the aftermath Rachel Reeves‘ Budgetreaching the highest level in a year on the bond market, prompted tense comparisons with the mini-budget in September two years ago, which ended the former prime minister’s work Liz Trusspolitical career.

But today’s traffic is light in comparison. Moreover, information has emerged that may explain some of the bond market’s concerns.

UK 10-year bond yield is now 4.48 per cent, up from around 4.24 per cent just before Ms Reeves announced her budget, an increase of just under a quarter of a percentage point.

Holders of British government debt sold some of it, causing bond prices to fall, meaning the amount of interest they pay increased.

The change was less dramatic than that after Ms. Truss’s mini-budget disaster, said Hal Cook, senior investment analyst at stockbroker Hargreaves Lansdown.

“It was a huge move: the 10-year Treasury yield rose from about 3.3 percent a few days before the mini-budget to about 4.5 percent a few days after it.”

More recently, bond yields have been rising since mid-September, he said. “There are several reasons and one of them is the upcoming budget. “The uncertainty around this particular budget has made bond investors nervous, and expectations of higher future debt in particular have weighed on sentiment about the attractiveness of UK public debt.”

Moreover, it emerged today that the government spending watchdog, the Office of Budget Responsibility, had incorrectly estimated how much room to maneuver Ms. Reeves would have by switching to a new measure of government debt.

Ruth Gregory, deputy chief UK economist at Capital Economics

In a footnote first spotted by Bloomberg, the March estimate of £62 billion was an “error” and the figure was actually £18 billion lower, leaving markets wondering whether it had made finances too difficult for Ms Reeves.

Apart from the OBR error and the modest nature of the increase in debt costs, there are plenty of other differences between this week’s budget and Ms Truss’s.

The market went crazy because Ms Truss planned to use the debt for tax cuts and hoped they would lead to sharp growth – the details of her plan were not made clear. She also argued that her plan could be implemented without cuts in government spending, a claim few economists agreed with.

The International Monetary Fund openly criticized Ms Truss’s plans, but welcomed Ms Reeves’ budget. Both were considered extraordinary moves by UN agencies.

In the days after the budget was passed, Ms Truss was under increasing pressure to resign. She hoped that her chancellor Kwasi Kwarteng’s fall on the sword would save her, but she ultimately resigned a month later under pressure from her MPs.

A week before his resignation Daily Star the newspaper asked if it would stand up to lettuce. She couldn’t.

Polls then showed the Labor Party ahead by as many as 36 points, which meant that its Conservative Party had only 22 seats in parliament.

It also strengthened the pound, with the pound sterling at one point approaching a value of just one dollar.

A soaring lending rate has upended the mortgage market, upending thousands of people’s plans to buy a home and driving up borrowing costs by billions.

The confusion also wiped out the valuation of pensions in 2022 by £425 billion, according to this year’s report from the pensions regulator. Some pensions that invested heavily in government debt also faced low yields. They were forced to sell this debt, which resulted in a further increase in profitability. They eventually recovered with help from the Bank of England.

Ruth Gregory, deputy chief UK economist at Capital Economics, said: “The market impact from Wednesday’s Budget is a long way off from the mini-budget episode of 2022. Although we cannot entirely rule out the possibility of a rapid rise in government bond yields triggering a self-reinforcing cycle of further declines prices, we don’t think this is the beginning of another “Liz Truss” scenario.

It was also widely acknowledged that Ms Reeves’ hand had been somewhat forced by the mess she inherited from the previous government. The Office for Budget Responsibility said the previous government spent an extra £9.5 billion at the start of the year, which was “not disclosed to the OBR”.

However, higher debt costs will be unwelcome news for Ms. Reeves. On the UK’s £2.69 trillion debt load, a quarter of a percentage point increase in borrowing costs translates into additional interest costs of £6.7 billion a year. In practice, debt costs are fixed when bonds are sold, but if higher yields persist, it will cost the taxpayer more if more debt is issued.

Ms Reeves also downplayed the impact, saying “markets will move every day” and sought to reassure her of her commitment to “economic and fiscal stability”.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), warned that the “incredibly low spending growth” in the budget means taxes will likely have to rise again if Ms Reeves’ growth plan backfires.

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