Investors can't trust Labour, warns UK bond giant
Sonja Laud, the chief investment officer at L&G, said the decision to abandon key benefit reforms and reverse course on winter fuel payments had destroyed faith in the Government's economic plans.
L&G is one of Britain's biggest investors, managing £1.1 trillion of assets. It is one of the biggest buyers of UK government debt.
Ms Laud said: '[Markets] can't trust that what's been put forward will be put in place. You will see the adverse reaction. It was quite a big one yesterday.'
It follows a dramatic day in which Rachel Reeves's tears in the House of Commons triggered a fall in the pound and a jump in borrowing costs. Investors were concerned that the Chancellor could be on the brink of leaving Downing Street, sparking fears that her fiscal rules could be abandoned.
However, borrowing costs had been rising even before the Chancellor wept after Sir Keir Starmer gutted his welfare reforms on Tuesday night to avoid an embarrassing defeat on the legislation. The about-turn has blown a £5bn hole in Ms Reeves's budget.
Ms Laud said: 'The changes we have seen ever since the first announcements from the Labour Party - and the intended changes they wanted to put forward - have subsequently been either watered down or changed.
'That's what the bond market does not like. The reaction in the gilt market yesterday [shows] that there clearly is an unwillingness to accept that lack of clarity.'
She added that traders were still nervous after Liz Truss's mini-Budget. She said: 'There's heightened sensitivity in the UK because of what happened in 2022, where you had unfunded fiscal promises.'
Ms Laud's comments come as Sir Keir and Ms Reeves scramble to repair the damage done this week. The Chancellor made a surprise appearance alongside the Prime Minister at an event on Thursday, at which she insisted she remained committed to her fiscal rules. The Prime Minister also said Ms Reeves would remain Chancellor 'for many years to come'.
Borrowing costs dipped in response but remain higher than where they were just days ago.
David Roberts, at Nedgroup Investments, said the bond market turmoil was a 'flashback to the days of Liz Truss'.
'Having been elected on a mandate to sort out public finances, to rein in benefit spending, it appears many in the [Labour] party have decided to return to their traditional tax and spend ideology,' he said.
'Failure to push through welfare reform whilst adhering to fiscal rules seems to leave the Government with little option other than to raise taxes.'
Morgan Stanley warned that the struggling Chancellor could be as much as £30bn in the red against her fiscal rules ahead of the autumn Budget. With limited room to borrow or cut spending, 'tax hikes look most likely,' the bank said.
Sir Keir's failure to grasp the nettle of welfare reform means Britain will spend £1.5bn a week on health and disability benefits for working-age adults by the end of the decade.
The bill is on course to balloon to £75.7bn by 2029-30, up by one quarter from £60.4bn this year. It puts the cost of this portion of the welfare state on a par with the defence budget.
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