Reeves faces pressure to balance the books as borrowing costs rise
Rachel Reeves faces further pressure to balance the books as the UK’s borrowing costs hit their highest level since the 2008 financial crisis.
The Chancellor is said to be prepared to impose more severe spending cuts on departments if necessary, having already ruled out increasing either borrowing or taxes.
She has also asked ministers to draw up alternative plans for securing growth and “cease anti-growth measures” as she attempts to meet the Government’s aim of improving living standards across the country.
Review
Any further spending cuts could be announced in the Chancellor’s planned fiscal statement on March 26, ahead of a spending review that has already required Government departments to find efficiency savings worth 5% of their budgets.
The prospect of further cuts follows a rise in the yields on government bonds, which reflect how much it costs the Government to borrow money.
Yields on government bonds continued to rise on Thursday, up eight basis points to 4.89% for 10-year gilts, which is the highest since 2008.
These yields settled later on Thursday afternoon, sitting one basis point higher for the day at 4.82% when London’s market closed.
The rise in gilt yields has an inverse effect on the price of these government bonds, which are falling as a result, with some saying the current market woes echo those seen in the fallout from the disastrous mini-budget of former prime minister Liz Truss in 2022.
Headroom
The rise in the cost of servicing government debts could cut into Labour’s expected financial headroom in a potentially worrying sign of how investors see fiscal sustainability in the UK.
That headroom against Ms Reeves’s debt target was already “razor-thin”, according to Isabel Stockton of the Institute for Fiscal Studies (IFS), meaning persistently higher interest rates could force the Chancellor to act or break the fiscal rules she set herself at the Budget in October.
Ms Stockton added: “If continuing to meet the fiscal target requires new tax rises, or cuts to the already tight-looking spending envelope for the subsequent spending review, then the Chancellor – and we – should not be surprised.”
The Chancellor has previously ruled out both increasing borrowing and raising taxes following the significant tax hikes in October’s Budget, leaving her with few options beyond further spending cuts.
Meanwhile, the Conservatives have criticised the Chancellor for proceeding with her planned trip to China this weekend rather than remaining in the UK to address the rising cost of borrowing.
Shadow chancellor Mel Stride said Ms Reeves was “missing in action” and accused her of “wheeling out her deputy to defend her loss of control of the public finances” as Treasury Chief Secretary Darren Jones answered questions in the Commons in her place.
Orderly way
Mr Jones said the trip was “important” for UK trade and would continue.
While Mr Stride said the Government was making “a panicked attempt to reassure the markets”, Mr Jones insisted that the bond market was functioning in an “orderly way”.
Mr Jones also pointed to global factors influencing the gilt market, saying there was “no need for emergency intervention”.
Government bonds have faced a sell-off around the world in recent months in the face of worries that US President-elect Donald Trump could introduce a tariff policy which would be inflationary for many international economies.
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Wrong Chancellor, wrong Governor of the Bank of England, wrong policies and wrong outcomes to follow… This is a mess – initiated largely by the Governor and his acolytes – that an incompetent Chancellor fails to understand and will certainly fail to respond to appropriately. Aided and abetted by the herd of Muskolites (sic) that are emerging from the shadows. Right-wing newspapers and economic ‘commentators’ who should know better. The bankers in the City of London. Reform, who only want to supercharge the stupidity… The fatuous quantitative tightening programme must cease immediately, interest rates should be quickly reduced towards 3%… Read more »
And there is no need to ‘balance the books’. That simply demonstrates a naive and deeply wrong view of government financial management, to the detriment of (most) of us all.
The trickle-up gush continues…we get politicians’ mush in return!
The current government deficit is £120 billion per annum, and the current budget will only marginally improve the situation. This is far too high in the current economic climate
As somebody who works in banking, the mistake made is that taxes haven’t risen anywhere near enough. They almost certainly will need to rise again in the next 12 to 18 months
That deficit is the cost of state pension benefits. The truth is that Brexit Britain can’t afford retirees. Johnson understood this which is why he tried to let covid rip until he realised what that would do to party membership.
That’s a bit cynical but in Johnson’s case I wouldn’t rule anything out. As for that “deficit” we have governments, Labour and Con, that quite merrily lob billions into bottomless pits like HS2, big ticket defence contracts that are often cost-plus with little or no sign of controls, palace refurbs, etc etc. When it comes to social policy to keep the population alive and well they are out there with hatchets cutting everything in sight.
Why are we giving handouts to millionaires? We should immediately means test the state pension. It’s a small price for the sovereignty that the over 65s backed with a supermajority, the only demographic to do so.
The biggest handouts to millionaires don’t come via state pension, it’s the loopholes that the current tax regime allows all sorts of mitigation/ avoidance for high earners. If a person is a very high earner during working life then it is quite probable that he/she is a high earner in retirement. That should enable HMRC to collect taxes at the appropriate level from such people, but it doesn’t because these are the people who have accessed the clever dick advisers who have driven horse and cart through the tax mazes constructed by successive governments. To date the Labour regime seems… Read more »
Tax avoidance is a different topic but both parties are just a thin layer on the Whitehall bureaucracy that really runs the show. One way they prevent change is to keep things complicated. New political demands result in more pages of a tax code so complex only those who can afford the best accountants can make sense and take advantage of. That’s no accident. And it won’t change until we move government out of Whitehall. What makes sense to people walking the dark 18th century candle lit corridors every day will seem ridiculous when they’re in an average office near… Read more »
“Tax avoidance is a different topic” .. Not at all. It is part of the network that protects a select segment of society from the burden that they should be bearing. It is this silo mentality that you display that enables governments and other vested interests to duck the issue. Smashing the complex structures that currently exist to benefit only the seriously wealthy would be a big step towards easing the burden on the far less well off.
Muddying the waters is the go-to of those that don’t want change. How revenue is raised is a different topic to how it’s spent.
If you don’t have a bad habit of gifting money ( tax avoidance) then you don’t have to resort to screwing down on those further down the income scale. Your nest is obviously well lined and you don’t like the thought of paying your share of the burden. Tax mitigation is about as muddy as you could ever make the waters of public finance.
Sorry, Barry, your first claim is incorrect. Our pensions are 38% of the European average – in the sixth wealthiest country in the world!
We could stop giving it to the 25% of retirees who are millionaires and boost it for everyone else. People did after all pay National Insurance. Insurance usually only pays out when you need it.
With respect, John, what is your criterion for a ‘deficit’ being ‘far too high in the current economic climate’. Surely, near-recessionary times require counter-cyclical action, higher deficit…? Do you understand the role of the deficit in providing a safe place for savings? Are you aware of the history of deficits since, say, the Second World War? Or how the latter was funded? (Hint: MMT, like Covid, the 2008 – 09 banking crisis caused by your inadequately regulated colleagues of that time). How would you justify withdrawing even more services and assistance to many people already on the breadline? There is… Read more »
As somebody who works in banking you should have the courage to spill the beans rather than engage in flimsy attempts at deflection.
When your government swaps your energy supplier for one costing two or three times as much you end up with economic misery. No surprises there. What’s galling is the nation that demanded this swap (USA) is the very one making a fast buck from Europe’s and UK’s demise.
Hi Vlad, so your friendly advice is to go back to Russian gas?
Europe is still consuming Russian gas…it just comes in via the back door.at a higher cost.
So your friendly advice is to go back to Russian gas.
Too late. The bridges have been burned so to speak. Europe’s and UK’s economies are condemned by ill thought through geostrategic policies to decades of stagnation. That will not help any cause you choose to support.
Isn’t our real problem Vlad that we don’t have enough gas storage for when the wind isn’t blowing? This means were forced to pay top dollar for gas when we could be buying it up and storing it when it’s cheap.
Europe has gas storage and yet, the industrial powerhouse Germany is in serious trouble because like us, their energy costs have made them uncompetitive. The problem ahead is more to do with the question can any energy source provide sufficient power at a price that enables the economy to thrive while still making it’s provision profitable for producers.
It is our fault we don’t have enough storage, successive tory governments have operated a “just in time” operation when it comes to gas supply and have closed down or sold off gas storage facilities, in 2022 the uk held 9 days supply
Liz was right about one thing. The anti-growth coalition is real. Treasury and BoE orthodoxy is the problem. It’s time for a second opinion. Where’s The Troika when you need them?
what is your advice to do anything differently than what they are doing?
Neither institution was formed to run a modern economy. The BoE was set up by slave traders to bankroll the empire, the Treasury to hide the loot. Having everything these institutions are doing independently reviewed by global experts should concern no-one.
so your advice is to stop slavery?!
Seriously though, the options are quite limited whilst inflation is high and unlikely to decrease anytime soon.
Removing trade barriers and red tape with the largest single market in the world on our doorstep is one option to reduce inflation. Isn’t it?
And these two institutions are focused on London as the sole engine of growth. This is legacy thinking. Targeting the underperforming economic regions of the UK instead will add far more to UK GDP than trying to squeeze a bit more out of an exhausted capital.
well, the UK isn’t rejoining the EU, sorry. And inflation is high across the EU/US, so the UK isn’t alone, though Brexit clearly hasn’t helped.
The BoE are a central bank, so financial services is key to their remit. I think I’m right saying, if the financial sector grows by 4% this year, the welsh economy would have to double in size to match the additional tax revenue. I’m not trying to be argumentative, but that’s why it’s so important to the UK government. Clearly, we need policies in other parts of the UK as well.
First, we don’t need to be in the EU to be part of the single market. The question on the ballot paper only asked about EU membership. Second, your assessment exactly highlights the myopic thinking in the Treasury because GDP growth in the regions isn’t only about extra taxes raised. It’s also about the reduction in public spending that comes with being a wealthier region. And today there’s another example of Treasury self-harm. Gas storage is back on the agenda. The Treasury was happy to close the Rough gas storage facility in 2017 to save some money. It was hastily… Read more »
Promise I’m not picking on you, Barry, but…
I tend to agree with your second paragraph.
Removing trade barriers might help – so let’s rejoin the single market and the customs union, the quickest way that could be achieved.
And I want red tape to protect our people from poor quality products and the degradation of our environment, say. Do you not want that?
We want red tape to trade with those who don’t have similar standards and economic conditions. We don’t want it to trade with those that do. It’s the exact opposite of Brexit which touted free trade deals with everyone and now people are surprised our steel jobs are going to India.
Alas, Barry, Liz was wrong just about everything.
As it happens I’m against growth too, but have absolutely no confidence in the Treasury or the Bank of England to deliver that or much else. Both incompetent and ideology-driven.
But I am for growth in well-being, in culture and the arts, in food quality, in sustainable transportation…just not in economic growth they way that neo-liberal capitalism defines it.
So, there’s your second opinion.
The growth you want comes with wealth, and the only tool we have today to measure national wealth is GDP. Growth refers to increasing GDP which in turn boosts tax revenues allowing for more money to be spent on culture and transport, for example. You can argue forever about how wealth should be defined, if GDP (or better GDP per capita) is any good at measuring it, and what sectors we should focus on growing (diversity is king, relying on just financial services is a folly). But, when all is said and done, lower GDP almost certainly means less of… Read more »
Oh, Barry, no. I recall Margaret Thatcher saying that we needed a strong economy before we could spend on improving the environment. We – er, a few of us – are very much wealthier now (larger GDP too!) than then but we still won’t spend sufficient funds on protecting the environment. Go figure. GDP is a ridiculous measure – read Bobby Kennedy – “measures everything except the things that are worthwhile” – https://www.theguardian.com/news/datablog/2012/may/24/robert-kennedy-gdp I’m sure you’re right about diversity in the economy though, and the reliance on financial services will frequently bite us (see 2008 – 2009, perhaps 2025). All… Read more »
I bet Liz Truss is drafting her letter to Sir Kier at this moment. I don’t mean that one.