Reeves faces pressure to balance the books as borrowing costs rise
The Chancellor has been criticised for continuing with a planned visit to China amid rising yields on government bonds.
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Your support makes all the difference.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.
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.
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.
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.