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Investing.com – The new Labour government announced its first budget last week, and Deutsche Bank (ETR:) now studies whether the UK public finances are on a more stable footing.
UK Chancellor Rachel Reeves detailed £40 billion of tax hikes to plug shortfalls while also adding just over £30 bn in annual borrowing to the previous government’s Spring Budget projections.
Following on from the budget, gilt yields have risen. Short-term interest rate expectations have picked up, and higher interest costs have added effectively another £5 bn in debt servicing costs to the Chancellor’s bill, eating further into her fiscal headroom.
“To be sure, for the Autumn Budget to pay off, we will need to see a bigger growth dividend from both day-to-day spending and capex. At present, the OBR expects sustained growth improvement to only crystalise between 2030 and 2035. The faster it does, the better,” analysts at Deustche Bank aid, in a note dated Nov. 5.
Following the Budget, Reeves noted that the public finances were now unequivocally on stabler footing.
However, “despite the big tax raising event, big challenges remain for the Chancellor. New fiscal rules have shifted the fiscal headroom arithmetic – but given that the Chancellor has opted to use much of this, fiscal constraints will continue to be a big feature of future fiscal events,” the German bank added.
And more risks linger going forward.
“The Chancellor may have to return to raise more taxes or cut spending – or more borrowing may ultimately be inevitable over the course of parliament’s session,” Deutsche Bank said.