It’s a regrettable reality that a politician – or an entire government – can limp on for months or even years after losing credibility in the eyes of voters. In contrast, when markets think the credibility is gone the consequences can be much more immediate. Just ask Liz Truss.
One week from today, the Chancellor’s credibility will be tested on all fronts, having already taken a pounding. The charge sheet is long.
Before the election, Rachel Reeves vowed that Labour would be “the most pro-business government our country has ever seen.” This promise, thrown out in stump speeches without any thought behind it, crumbled within weeks after Labour’s first Budget shackled businesses with £40bn worth of tax hikes.
Then there’s the Employment Rights Bill, opposed by every employer and industry association. Unemployment has risen every month since Labour came to power, and the swelling of employment law hasn’t even come into force yet. Most pro-business government ever? Give me a break.
What remained of the Chancellor’s credibility surely evaporated following the absurd spectacle of an emergency pre-Budget address to the nation, softening Brits up for a manifesto-busting rise in income tax, only to signal a u-turn on the idea through chaotic late-night briefings to the media. The longest run-up to a Budget that anyone can remember has been characterised by leaks, spin, shoddy comms, rumours and political chaos which has all had a real world impact on business decisions and activity.
Too soon for a sigh of relief
Ordinarily, confirmation that an already over-taxed nation won’t be subjected to fresh raids on earnings would cause a sigh of relief, but in this instance the briefings leave me nervous. The reason relates to the second great credibility issue facing the government: market reactions.
There are many reasons why UK gilt yields have been trending down in recent weeks, but one of them is because investors expected a definitive and unambiguous tax rise; the only option left to a government that won’t cut spending.
The expectation that the Chancellor will now pursue a “smorgasbord” of other levies (deemed “mouldy and unappetising” by former IFS boss Paul Johnson) could unsettle the bond markets. David Zahn, the head of European fixed income at Franklin Templeton, said there was a real risk that Reeves “disappoints” and triggers a sharp rise in yields, something that could – in the event of an extreme adverse reaction – “force her hand to do a secondary Budget.”
The Chancellor’s political credibility is shot; her credibility with the markets will be put to the test one week from today.