£26bn in Tax Rises — But Markets Barely Blinked

On Wednesday, Chancellor Rachel Reeves unveiled her new budget for the UK. The headline was that the Budget included around £26 billion of tax increases over the next few years.

Whilst there is no big rise in income tax as some people speculated, the government is raising money through lots of smaller changes, such as:

• Keeping income tax thresholds frozen until 2031 (meaning more people are pushed into higher tax bands as wages rise).
• Reducing some of the tax advantages of salary-sacrifice pension schemes (so some employees may pay a bit more tax on pension contributions).
• Higher taxes on dividend income for investors (affecting people who hold shares outside ISAs or pensions)

Financial markets didn’t panic. In fact, their reaction was very quiet.

• Long-term government borrowing costs fell slightly. UK government borrowing costs (called gilts in the UK), typically move incrementally higher or lower, over the seven or so trading days after the budget speech. This reflects the market gradually digesting and pricing-in the full details of the budget for the outlook for the UK. Just after the budget was announced, 20-year gilt yields (which move inversely to prices) were slightly down on the day at 5.15%, having moved in a range of 5.14% to 5.25%. A fall in yields means investors were slightly more comfortable buying UK government debt.
• Equity and currency markets remained relatively muted, with the Pound sterling trading flat-to-slightly up, and UK equity markets ticking higher.

All in all, this muted reaction tells us investors see the Budget as sensible and expected, rather than something that will cause big economic disruption. A calm reaction usually means investors think the plans are realistic and not likely to cause financial instability.

The Noise

• Global equity markets remained calm this week. Asian and European markets saw small gains, while US markets were mixed because of concerns around some big tech companies. Overall, the tone was quietly optimistic, with no major shocks.
• Government bond markets strengthened as investors began to expect future interest-rate cuts. This pushed bond yields lower and prices slightly higher, especially in the US. Bond prices often rise when investors turn cautious or expect interest rates to decline, since demand for safer assets increases alongside future yields being expected to fall.
• Commodities had a mixed week. Precious metals like gold saw steady demand, oil prices, however, remained under pressure due to concerns about global demand and supply levels.