Chancellor Rachel Reeves hosted a post-Autumn Budget reception last week in an effort to get influential City decision-makers to help sell the budget. As reported by the Financial Times, a person briefed on the event said that the mood was  “a lot more positive and warmer than expected while the chancellor struck a confident tone”. If that sounds a little too understated, consider the mood ahead of the budget.

‘Currency traders bet against sterling ahead of Budget’, read one headline in that same newspaper, with traders projecting increased taxes could dampen economic growth.

Meanwhile, analysts at ING cautioned that “sterling faces dual risks on Budget day”. Their baseline case saw moderate sterling depreciation. A more bearish scenario would be one in which “budget announcements don’t convince markets that the fiscal path is sustainable”, which “could shape into an uncontrolled selloff in gilts and sterling”.

In the end, the response has been (so far) moderate, with an initial rise in sterling, as investors were reassured by higher than anticipated fiscal headroom.

GBP and gilts subsequently dipped as the markets chewed on the full implications of complex budget proposal.

So no major news, which will be (modestly) good news for the embattled Chancellor.

In the end, numbers speak louder than cocktail parties: currency traders will draw their own conclusions, weighing fiscal headroom against the government’s resolve.

Buying time?

The relatively sanguine response to the budget raises a question: did Reeves skilfully thread the needle, reassuring markets on fiscal prudence while kickstarting growth and honouring the party’s pledge to sustain investment in services and infrastructure, or has the government simply kicked the budgetary can down the road?

Many of the planned cuts are backloaded, as are tax measures, while the need for additional revenue looms, plausibly through higher taxation, a politically fraught decision the government appears to be deferring.

An alternative (or complementary) view argues for an urgent, radical shift toward a pro-growth economic model. From this perspective, the budget’s modest impact counts against it. The government faces a complex and politically charged landscape, yet Martin Wolf laments that “what is depressing is that a government with a huge majority dares to do so little to transform economic prospects.”

Wolf concedes that “it is easy to imagine far more irresponsible budgets than this.” But when the stakes are this high, good enough may not be good enough.

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