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The UK government is drawing up new growth initiatives in a bid to avoid “catastrophic” tax hikes after a punishing week in markets that threatens to derail its policy agenda.
UK borrowing costs climbed close to a 16-year high on Friday, capping the worst week in a year for the nut market after a sell-off that dragged down the pound and left the government scrambling to reassure investors on the state of public finances.
When Rachel Reeves returns from a trip to China on Monday, the chancellor plans to present a compelling “growth narrative,” including new economic policies, with a speech due later this month, according to officials.
Officials said the government is determined to avoid further tax increases on top of the £40bn package it outlined in October, with one saying it “would just be completely disastrous”.
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Instead, the government is looking to increase and rein in public spending after a damaging rise in government borrowing costs.
Officials and ministers are bracing for possible cuts to departmental spending plans in the next spending review, which will be held on June 11, according to people familiar with the process.
As part of its pro-growth agenda, Labor plans to change the “writing” process by which different departments agree collective policy-making.
“Departments will be asked whether the policy will have a beneficial impact on growth and if the answer is yes, then we will do it – as a broad principle,” a Treasury official said.
At the same time, departments will also be given a strong message during the spending review process that if they are pushing policies that are a “growth drag” then these will need to be “reviewed”.
But economists warned that the gilt market sell-off had exposed serious weaknesses in the party’s strategy for the economy and public finances, criticizing the government for failing to build enough of a margin for negative changes in its October budget and for being slow in detail. growth initiatives.
“They now need to show they are serious about tackling the UK’s fiscal challenges in a world of higher rates,” said Ben Nabarro, UK economist at Citigroup. “This means facing weak structural growth. But they are also misguided if they think that growth alone can save them from this fiscal hole. Some spending and tax adjustments are also needed.”
The Bank of England says the economy failed to grow in the final quarter of 2024, following weaker-than-expected readings at the end of last year. Business surveys have highlighted a loss of confidence following the tax hike in October’s budget.
The 10-year walnut yield ended the week at 4.85 percent, up 0.25 percentage points from a week earlier, while sterling fell to $1,219, its weakest level against the dollar since November 2023. Shares in the index The country-focused FTSE 250 fell 4 percent this week, its biggest drop since June 2023.
Reeves’ October budget, which included a sharp increase in borrowing, has fallen victim to a sharp sell-off in global bond markets due to renewed fears over inflation.
That has dragged government bond yields higher everywhere, as investors bet that central banks will be slower to cut interest rates. This has mixed with investor concern about the UK economy to push the country’s 30-year borrowing costs to their highest level this century.
“The more yields go up, the worse the fiscal situation gets,” said Mark Dowding, chief investment officer for fixed income at RBC Bluebay Asset Management.
Strong US jobs numbers added pressure on the bond market on Friday, prompting traders to bet on an even slower pace of interest rate cuts by the Federal Reserve. The next key moment for breasts will be UK inflation figures next week.
One area where Reeves will highlight major reforms is setting out new details of a “new planning and infrastructure bill”, which is due to be introduced to the House of Commons in March and aims to speed up development.
A senior Labor MP said: “The Government desperately needs to bring forward a growth plan … and this is more important than ever for businesses facing higher National Insurance, a new package of employment rights and a higher minimum wage.”
Another Labor veteran said recent polls saw Labor down to 24 per cent made him want to “slam my head on the table”, although they said Starmer’s leadership was probably safe for at least another year. “If Labor starts to look like they don’t have a coherent or even credible narrative to sell the markets, then they’re doomed, aren’t they?”
Data visualization by Keith Fray
