Rachel Reeves has boxed herself in over borrowing – only the markets can save her now

Those of us who are geeky enough to watch things like bond yields have been aware for some time that Britain’s borrowing costs have slowly been moving towards breaking point for the chancellor. But now, there’s nowhere for Rachel Reeves to hide – everyone knows about it.

We’ve had questions in the House of Commons, government bond prices have jumped from the financial conversation into the national one – and the story has moved from the business pages to the front pages. That overused “C” word – crisis – is now being repeated ad infinitum.

Justifiably? Yes, indeed. Those costs have even passed the level they reached when Liz Truss was in power.

You might well be saying, “Hang on, how come the economy isn’t teetering on the brink of disaster like it was then?” Only a few outliers are talking about Keir Starmer sacking Reeves as Truss had to do with Kwasi Kwarteng, before she installed Jeremy Hunt to essentially reverse her disastrous mini-Budget. No one is talking about reversing the Reeves Budget.

Well, for a start, the current crisis didn’t happen overnight, as with Truss – and it is global in nature. While Britain has been particularly hard hit because of the state of its economy and public finances, the yields (interest rates) on bonds issued by the US have surged, too, amid concerns about the pace of rate cuts across the pond and the prospect of a lot more borrowing under Donald Trump. They have risen for France and even for Germany.

But developments in the US have tended to have a big impact on UK assets – and so it has proved once again.

John Gieve, a former deputy governor of the Bank of England, told the BBC’s Today programme: “This is very different from the Truss debacle, in that it’s not a response to anything we’ve done in the UK.”

So, does that get Reeves off the hook? Well, no. Because some of her decisions have certainly contributed to the problems the UK faces. For a start, the Debt Management Office (DMO) has been issuing a lot of bonds with more borrowing to come. That is courtesy of Reeves’s plans.

A big chunk of the extra debt is designed to fund investment, which is the right thing to do for an economy that desperately needs it. But it has served to exacerbate the chancellor’s short-term difficulties – and contribute to the very awkward position she now finds herself in.

The £9bn or so of headroom she had against her fiscal rules before the markets pushed Britain down the road to fiscal hell has all but evaporated. In the absence of yet more borrowing, which would mean breaking those rules, Reeves is left with the unpalatable choice of either cutting spending (option one) or once again raising taxes (option two) – or a bit of both.

Gieve said cuts would have to be “very severe” to make the numbers add up, while Labour has repeatedly promised that austerity is over. Option one is thus a very tough sell. Trouble is, Labour has promised not to raise taxes again, ruling out option two as well.

Any fiscal event would also require the sign-off of the Office for Budgetary Responsibility (OBR), whose powers were beefed up by, you’ve guessed it, Rachel Reeves. (Sorry, but some of her problems were self-created.)

She could always declare an emergency and use this to, say, hold off on planned increases to defence spending or perhaps increase employees’ national insurance (she can’t push employers payments any higher without facing a full-scale revolt from business). But either would trash the government’s credibility.

The chancellor really is in quite the pickle. Planning a trip to China while the bond markets were spluttering left, right and centre was a particularly bad look.

But wait, we’re forgetting secret option three, which I’m pretty sure Reeves will try and run with. It is to ride out the storm, cross her fingers and hope the markets move back in her favour. This isn’t as mad as it looks. Financial markets are apt to overreact – and after they’ve lurched in one direction, it tends to be followed by a correction before they ultimately find a level.

Some analysts have already said that they think UK bonds have been “oversold” and that they present investors with a buying opportunity. This could push yields back down. A widely anticipated interest rate cut in February would help no end; all the more so if the Bank of England makes dovish noises about the future. That will, of course, depend on inflation behaving itself, which it hasn’t been doing of late.

Another help would be if the economy were to pick up, which would calm the markets’ nerves about Britain’s prospects. Those nerves have been playing into this.

Can you see the problem with secret option number three? It will leave the chancellor at the mercy of events, rather than in control of them – which is the last place Britain’s chief financial officer wants to be.

Here’s the real nasty: Britain’s torpid long-term growth and the repeated failure of governments to address the fiscal challenges created by an ageing population mean we’ll probably be here again before the end of this parliament. Maybe even more so, during the next one.