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The lack of confidence in the British economy has become infectious. From businesses it has already spread to financial markets. Last week investors dumped treasuries and sold the pound as concerns over the UK’s fiscal sustainability grew. Ten-year government bond yields are near a 16-year high. If they don’t come down, Chancellor Rachel Reeves’ “ironclad” fiscal rule – to balance the current budget in five years – will be broken. To regain credibility, the Labor government must quickly detail credible plans to boost economic growth and rein in spending.
The recent sell-off in walnuts has been triggered by developments in the US. Higher inflation expectations in the world’s largest economy — linked to President-elect Donald Trump’s tariff agenda and strong economic data — have pushed up Treasury yields, the benchmark for global borrowing. This has fueled concerns about debt sustainability in other economies. But negative chatter about Britain’s “stagflationary” growth outlook, in the wake of last October’s autumn budget tax hikes and the limited leeway Reeves left against its fiscal rules, has made the UK a prime target for bond watchers. .
What can the government do? If yields don’t start to escalate out of control, murky announcements to cut costs or raise revenue now could come across as desperation and possibly even push yields higher. Bond yields ebb and flow, and the current selloff has not been erratic. Comparisons with the market panic sparked by former prime minister Liz Truss’s “mini” budget in September 2022 are vague.
But doing nothing is not an option either. Trump’s capriciousness means global bond markets will remain tense. And the message from investors is that their confidence in Britain’s ability to cut costs and boost growth in this volatile environment is very low. Labor must then flesh out its economic strategy, rather than talking vaguely about future efficiency savings and being pro-growth. Businesses and investors want to know how Britain’s prospects will improve significantly in the near term.
This means that the government must redouble its efforts to remove barriers to employment, investment and business expansion. Plans announced Monday to create AI “growth zones” are a start. But businesses also want to know how advocated reforms to the planning system will actually speed up building processes across the country.
The industrial strategy – due for spring – is also an opportunity to boost confidence by outlining a pipeline of key infrastructure projects and ambitious plans to improve access to highly skilled talent. Reeves could outline plans for tax breaks and simplification ahead of the autumn budget, which will be the main fiscal event this year. This can help whet the appetite of the business.
However, bond traders will be looking for evidence of short-term improvements in Britain’s fiscal position. The Chancellor is right to rule out further tax increases, which would be disastrous for confidence. But it means Labor must be prepared to make savings in high-cost but politically sensitive areas such as welfare benefits, the civil service and the triple freeze on pension payments. Indeed, if the fiscal arithmetic does not improve significantly, the government may make cuts to be included in the Office for Budget Responsibility’s next forecast on March 26.
Rising bond yields are a wake-up call. The work must remain calm and avoid hasty announcements, but it cannot continue in the slow and vague manner it has begun. It’s time for the government to outline – with wit and detail – its strategy to deliver growth and cut costs.
