Rachel Reeves has been warned that the spike in UK borrowing costs is worse than the crisis that ended Liz Truss’s premiership.
The interest rate on 30-year gilts – the government’s long-term financing vehicle – approached 5.25 per cent yesterday, the highest level for 27 years.
The surge heaps pressure on the Chancellor’s spending plans, which were already seen as tight despite her huge Budget tax raid.
Treasury official have been insisting that meeting the government’s fiscal rules – including balancing the government’s day-to-day spending budget by 2030 – is ‘non-negotiable’.
However, her headroom looks to have been all-but wiped out, potentially leaving Ms Reeves choosing between spending cuts and more tax rises – even though she previously pledged that the latter will not happen.
Although the rise has been slower than the response to the mini-Budget in 2022 – and rates have been surging around the globe – analysts sounded alarm that the picture is ‘more dire’ now and the mood on markets is ‘darker’.
Rachel Reeves has been warned that the spike in UK borrowing costs is worse than the crisis that ended Liz Truss ‘s premiership
The interest rate on 30-year gilts – the government’s long-term financing vehicle – approached 5.25 per cent yesterday, the highest level for 27 years
Sunaina Sinha Haldea of financial services firm Ramond James told the BBC Radio 4 Today programme there were concerns that inflation was ‘sticky’ even as growth stalls – known as ‘Stagflation’.
She said that was ‘viewed very poorly’ in the markets because the Bank of England would be unable to use its ‘most potent tool’ to revive activity, cutting interest rates.
‘So there’s no impetus to spur the economy into a growth mode. And markets are concerned that will absolutely cost the UK in terms of its economic outlook,’ she said.
‘It’s interesting to note that these interest rate costs if we sustain them at the nearly 5.25 per cent it hit on Tuesday it erases the room for extra borrowing that he Chancellor and this government would like to set in its own Budget rules and it needs to do in order to enact its own growth plans.
Asked whether the situation was worse than 2022, the economist said: ‘The mood music around the UK is different this time around because with Liz Truss there was an expectation that it would come back to correction because the government would change.
‘There isn’t this time around. So this time around the concern is a lot more real, and also the threat of tariffs from Trump could increase long term price pictures and price pressures in the UK in a way that’s quite fundamental.
‘Certainly this time around the concern is more dire and the mood is darker.’
Ms Reeves announced at the Autumn fiscal package that she was ramping up borrowing for more public spending and changing debt rules to boost investment.
However, UK plc has since showed signs of stalling with businesses warning of price rises and job cuts due to the extra burden.
Shadow chancellor Mel Stride said the rise in gilt yields was ‘yet more evidence Labour have driven our economy into a ditch’.
He said: ‘They talked it down. They taxed the life out of it. They’ve racked up borrowing. They killed growth. Now we are all paying the price with higher inflation, fewer jobs and lower wages.’
Although the rise has been slower than the response to Liz Truss’s (pictured) mini-Budget in 2022 – and rates have been surging around the globe – analysts sounded alarm that the picture is ‘more dire’ now and the mood on markets is ‘darker’
