UK Budget blues

Katie Martin (0:06)

Pushkin. The UK is building up to another budget. They seem to come around every five minutes, and the next one is in November. But UK government bonds, or guilts to their friends, are already pretty weak, and it would not take too much to weaken them further still. We all remember the Liz Truss mini-budget from 2022, and the lesson was bonds matter. They can take down a government and whack up your mortgage costs in the blink of an eye.

So today on the show we're asking, can the Chancellor, Rachel Reeves, pull this off? How? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in actually quite chilly London. And I'm joined in the studio today by a proper UK budget and central banking nerd, my colleague, Chris Giles. Yes, people, today's show is an American free zone. And relax. Chris, thanks so much for being here.

Chris Giles (1:08)

It's a real pleasure.

Katie Martin (1:10)

Budget day, it's a biggie for the FT. It's a big one for the UK government, but it's a bit of a kind of like set piece, almost ceremonial event that I don't think foreigners understand. Like, what's the deal with the budget?

Chris Giles (1:24)

So on budget day, the Chancellor comes out of 11 Downing Street, the Prime Minister, of course, is in 10 Downing Street, the next door house and holds up a big red box.

Now, traditionally, it was a box from in the mid 19th century, sort of 1850s, red box. It's like a briefcase, but made of wood and small. And the budget speech is in there, and the Chancellor comes out of the door, holds it up, all the press take pictures and shout at the Chancellor and say, what's in the box? What's in the box? And then he or she goes to the House of Commons and then opens the box and reads it out. Also the Chancellor, so one time when delivering a speech in the House of Commons, any MP is allowed to drink alcohol. And so we used to have quite fun chancellors who would have a large glass of whiskey as they were reading out the budget, but that has not happened, I don't think, since Ken Clark in the mid 1990s.

Katie Martin (2:14)

It's got to be Ken Clark, isn't it, realistically. There is quite a lot of sort of pantomime about this whole thing.

Chris Giles (2:23)

It's great.

Katie Martin (2:24)

Yeah, you do love it. We all love it really.

Chris Giles (2:27)

So, the Chancellor, who is the Finance Minister in other countries, he or she now, it's a she will read it out. And basically, what is announced on the day will get legislated for. This is where the UK is really different. There's no debates in Parliament.

Katie Martin (2:41)

Right.

Chris Giles (2:41)

It will go through. It's a big set piece, because the way that Parliament works is, as long as your party has a majority, that will happen. And so all the tax changes, which are supposedly secret in the run up to it, there's no debate in the country, then get announced on one day and that happens.

Katie Martin (3:01)

Just also to sort of set the scene a little bit, it's often said that the UK wants Nordic style public services, but with like super low tax rates. Is that a reasonable representation? Do we want an awful lot more for our money than we can really have?

Chris Giles (3:17)

Absolutely. So we want European style public services. So we have those essentially in our budgetary system. So we have free healthcare. We have an extensive welfare status, an extensive social security system, so pensions and other benefits. If things go wrong in your life, pre-schooling, all of this, you get all quite expensive stuff. And yet our taxes are generally, they're not as low as those in the US, but they're towards the bottom end of the international league table. And in some areas, they're really low. So for people on average earnings, direct taxes coming out of your pay packet are pretty much close to the bottom of similar countries because we have a big tax-free element in your pay and not very high income tax rates, so a 20% rate plus, then you need to pay national insurance, which is another sort of income tax, or one, forget the rate, 8% or so.

Katie Martin (4:15)

Right. And the government, it's been in power for a little over a year now, but it's painted itself into quite a corner. So in the run-up to the last general election that it won, it promised, put it in its manifesto.