It is not in France that the government plays great in the budget test. On the other side of the channel, Prime Minister Keir Starmer and his finance minister, Rachel Reeves, also walk on eggs, a few months before the long -awaited presentation of his project to recover from public finances in the United Kingdom.
The pressure that weighs on their shoulders is such that the rumors have already flown for several weeks in a possible deviation from the foreign government’s foreign government’s foreign minister. Because the previous budget, despite unpublished tax increases, did not help clean the accounts.
On the contrary, the United Kingdom had to borrow more than expected in June: 20.7 billion pounds sterling, 4 billion more than expected and an increase of 6.6 billion compared to June 2024. This is also the second highest amount for a month of June, behind June 2020, marked by the pandemic.
It is true that this increase in the public loan is partly linked to higher payments of interest due to a rebound in inflation throughout the channel (3.4% in May), a proportion of British, “golden” obligations, indexed to the evolution of prices. But the National Statistics Office (ONS) also evokes other reasons, such as salary increases granted to public officials or flight expenses.
“We cannot exclude a second ‘moment Liz Truss'”
“Overcoming expectations in terms of loan becomes the standard, and the fact that the loan flies last year can be seen as the sign that the Government has lost control of public finances in the United Kingdom,” said News Kathleen Brooks, an XTB analyst. Following the publication of this indicator, the yield of the gold at 10 years briefly rises to reach 4,645%. Sign of a certain voltage of the markets.
To the point of subjecting the Labor Government to the same destination as the one reserved for Liz Truss during the presentation of its budget in the fall? In 2022, the former prime minister was forced to resign after having revealed an ambitious “mini hard” sanctioned by panic markets. At that time, the British rates had shot themselves, forcing the Bank of England to intervene.
“We cannot exclude a second ‘moment Liz Truss’. (…) The context is conducive,” Judge with the BFM Busy Business Christopher Dembik, Investment Strategy Advisor at Pictet Am. For him, the situation in the United Kingdom is “worrying” because “they have an increase in public spending that is problematic” and the country “is one of the developed countries where debt burden is the most important.”
Public finance on a “unbearable” road
The Budget Responsibility Office (OBR), an independent agency responsible for providing analysis of British public finances, emphasizes that the United Kingdom has “the sixth highest debt, the fifth deficit (4.5% of GDP) the highest and the third highest cost of bird costs among the 36 advanced economies.” Public finances follow an “unbearable” path, it also warned the president of the Richard Hughes organization, while the debt could reach 270% of GDP by 2070 if there is no important action to stop the slippage.
“British public finances are in an unsustainable long -term situation. The United Kingdom cannot afford the many promises that it has made to the population,” he added, before attacking the relaxation of loan rules decided by Rachel Reeves during the last budget to finance heavy investments. Rules “among the most lax we have had.”
Compared to that of France, the situation of public finances throughout the channel, however, seems less worrying. In 2024, public spending represented 44.4% of GDP among our neighbors and debt less than 100% of national wealth, compared to 57.2% and 114% in France, respectively. But “there is no central bank that massively intervenes in the bond market” in the United Kingdom, unlike the European Central Bank (ECB), Viola Christopher Dembik.
“The Bank of England has never had this strategy. It is not on its software. It focuses on its main mission, controlling inflation. (…) The ECB has a design destined to create a security cushion that requires a long -term intervention, while the Bank of England has a different approach, which is rather turning off the fire in the event of a crisis,” adds the economist.
In other words, France can afford more budget generosity than the United Kingdom thanks to the action of the ECB. And investors are very aware of it.
Towards an increase in retirement age
From the Commons Chamber this week, Keir Starmer undoubtedly wanted to send a message to the markets confirming that, more than tax increases, his budget will have to “focus” on “create more wealth and guarantee a growing and prosperous economy.” “This has been the greatest failure of the last 14 years (conservative reign): we have not had an economy with significant growth,” said Prime Minister, while British growth should continue to be a dreamy this year, with 1% according to OBR.
For his part, Rachel Reeves did not exclude the increase in taxes on the greatest fortune, but Pat McFadden, another member of the Government, said that the Executive would respect his promise not to increase income tax, VAT or even employee contributions.
Another point that is likely to be uploaded to investors: the acceleration planned by Rachel since the recovery of the retirement age (currently 66 years and that must have to reach 67 years by 2028), while the cost of pensions covered by the State has passed from 2% of GDP in the middle of the twentieth century to 5% today and must amount to more than 7% in 2070.
In question, the aging of the population and the “triple blockage” that guarantees a revaluation of pensions every year to the highest rate between inflation, the level of increase in wages or 2.5%. According to the OBR, this mechanism, which some want to eliminate, has already cost three times more expensive than it was planned. The organization is unbearable in the long term, especially because certain studies claim that its maintenance will require the age of exit to 74 years in 2065 to maintain the current standard of living of retirees.
Flower within the Labor Party
But the words of the Starmer’s government will not be enough. It is the content of the budget that will serve as a peace judge.
What is safe at this stage is that the loan flight already feeds speculation about tax increases, analysts believe that the government will have to find additional 15 to 25 billion to guarantee compliance with its two budget balances by 2029. One of them establishes that current expenses must be financed by current income, the other arranged to reduce the GDP of the public sector.
To achieve this, Christopher Dembik does not believe much about the announcement of massive tax increases in the next budget: “I do not think that the British government has a lot of space for the maneuver to increase taxes.”
The economist of prevent the scenario of “drops of spending” that could cause “a revolt within the Labor Party”, with the risk of censorship of the prime minister “and the citation of possible new elections.
Keir Starmer faces a deep in his own group. His minister Rachel Reeves has already been forced to give up 6,25 billion pounds of budget cuts so as not to fracture the labor majority.
In recent days, he has had to reverse his bill to reduce assignments for people with disabilities, noting that almost a third of labor deputies opposed. Keir Starmer recently announced the abandonment of his project to eliminate universal heating aid for retirees. What contains the rebellion, at least for the moment.
Source: BFM TV
