The pound and UK bonds swung wildly after a key Budget document was leaked ahead of Chancellor Rachel Reeves’ speech.
The Office for Budget Responsibility published its report early in error – sparking chaos on financial markets.
The pound spiked higher against the dollar in the minutes after the leak – heading towards $1.32 – before plunging lower.
On the bond markets, the yield on ten-year gilts – a key measure of how much it costs the Government to borrow – tumbled to 4.425 per cent having been as high as 4.522 per cent earlier in the day.
But within minutes it was back at 4.54 per cent as international investors fretted over the Chancellor’s plans and wider handling of the economy.
The turmoil came as investors pored over details of the Chancellor’s Budget plans before she even announced them in the House of Commons.
Analysts warned that the Budget ‘lacks credibility’ as it is based on fiscal restraint in future rather than now.
Neil Wilson, UK investor strategist at Saxo Markets, said: ‘Here is the key to why markets might see this budget as lacking credibility – the direct effects of budget policies increase borrowing by £6billion next year but reduce it by £15 billion in 2029-30.
‘This was one of our key questions this morning – how are you selling fiscal restraint at the end of the parliament when you have signally failed to deliver any cuts or reform to welfare spending?
‘Who cares about the buffer if the assumptions are not credible?’
Kallum Pickering, chief economist at Peel Hunt, said: ‘My concerns are that the headroom – although it looks bigger the composition a lot of it is backloaded.
‘The market is being asked to believe the OBR forecast which is chronically optimistic, which is why I think the market is a bit concerned.’
Ahead of the Budget, the Chancellor was urged to avoid a confusing array of tax hikes to plug a hole in the finances, and instead cut spending.
Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management, said ‘raising taxes won’t translate into material revenue gains as this impairs growth and deters wealth creation’.
He added: ‘What the bond market would rather see is more action to tackle runaway welfare spending.’
Former Bank of England official Andrew Sentance has called for spending cuts of £20billion to £25billion alongside tax rises of £5billion to £10billion.
Wilson at Saxo, said: ‘It’s probably the most consequential Budget in a generation. It’s make or break for the Chancellor and the embattled Starmer premiership. The litmus test for its success is the bond market reaction.
‘I see three key questions that will need answering. One, to what extent are tax hikes going to drag on growth, which is antithetical to a self-declared pro-growth chancellor, which diminishes her ability to hit fiscal rules?
‘Two, to what extent are tax hikes inflationary, which deepens cost of living problems and restricts manoeuvrability of Bank of England to cut rates?
‘Three, to what degree are forecasts plausible – are they hinged on fiscal restraint in 29/30 that will depend on nebulous welfare reform and spending cuts, the kind of which the govt has signally failed to pass so far?’
Rachel Reeves is under pressure to reassure the bond markets her plan will work
Gilt yields have risen sharply in the past two weeks after Ms Reeves ditched plans to raise the main rates of income tax to shore up the public finances.
While such a move was set to be unpopular with voters – and breach the Labour manifesto – it was seen by the bond markets as one of the cleanest ways of raising money.
Oliver Faizallah, a bond investor at wealth manager Charles Stanley, said the U-turn ‘gave markets the view that the Government is not willing to cause party upset and make difficult decisions’.
He added: ‘Bond markets will be watching very closely, ultimately being the arbiter as to whether the Chancellor has done enough to put the country’s debt on a sustainable path.
‘The Budget will lay out the Government’s plans for how much they will be taxing and spending, and the timeline over which they plan to implement these plans.’
Patrick Farrell, chief investment officer at Charles Stanley, added: ‘The Chancellor needs to deliver a Goldilocks Budget today – one with just the right balance between supporting growth, preserving fiscal credibility, and not overburdening households or businesses.
‘It’s a tough ask and bond markets could decide Rachel Reeves has served up a dose of cold porridge for taxpayers while not doing enough to tackle a yawning fiscal black hole.
‘If the fiscal measures are considered too tight, as well as choking off growth, we could see political instability, which would be hard for bond markets to stomach. However, anything too expansionary would risk inflation and unsustainable borrowing.’
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