It has been a good day for investors in the Alternative Investment Market (Aim), with the index of the top 100 Aim shares up 4.3 per cent. But that merely serves to undermine the damage that Rachel Reeves had done to the market by previously suggesting that she might remove the exemption whereby Aim shares were free of inheritance tax (IHT). In the event, she made Aim shares liable for 50 per cent of the normal rate of IHT – hence the relief rally. Yet Aim shares are still down 2 per cent since election day. By contrast, the Ftse small cap index – smaller shares within the main London market – is up 2 per cent over the same period.
The Ftse 100 did not have such a good day, down 0.7 per cent. It would have been surprising had there been any greater movement, given how much of this budget had been leaked beforehand. The burden of higher NI contributions and a 6 per cent rise in the National Living Wage had already been baked in.
Investors in UK government bonds were less than impressed with Reeves, too. The yield on 10-year gilts stood at 4.24 per cent when Reeves stood up to speak. By the close of the London market, it had surged to 4.39 per cent. In mid-September, yields were at 3.8 per cent. Yields move inversely to prices, so the rise in yield means that gilt prices have fallen. In other words, investors are less confident than they were yesterday that the government will be able to cover its debts, and are therefore demanding a higher interest rate to compensate them for the risk.
This is not yet a ruction on the scale that followed Liz Truss’s mini-budget two years ago, but it is hardly a great vote of confidence in Reeves, either. She might have convinced herself that she is only borrowing to invest and that she will be able to balance day-to-day government spending with revenue. Markets, though, tend to take fright at any increase in borrowing – and £100 billion extra borrowing over the next five years, with £13 billion to come in the next year – means a lot of extra debt to service. It certainly isn’t suddenly going to produce extra revenue to pay the debt. Moreover, they may remember how Gordon Brown made the same promise of borrowing only to invest – and yet left office with a current account deficit of nearly £160 billion (and that after shunting a lot of government debt off balance sheet in the form of the Public Finance Initiative).
It is interesting how the attitude of the Left has begun to change in the light of bond market movements. In the wake of the Truss budget, markets were seen by many in the Labour party as wise old owls who had rightly seen the folly of Truss’s neoliberalism and tax cuts. But yesterday, a Guardian headline asked whether ‘bond vigilantes’ were going to ‘punish’ Rachel Reeves. It seems that bond traders have gone back to being evil capitalists now that Labour is in charge of the economy.
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