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The UK government is setting out new growth initiatives in a bid to avoid “catastrophic” tax rises after a brutal week in markets that threatens to derail its policy agenda.
UK borrowing costs rose to their highest level in 16 years on Friday, closing at the close Worst week of the year As for the gold market, after sales led to a decline in the pound and left the government scrambling to reassure investors about the state of public finances.
When Rachel Reeves returns from a trip to China on Monday, the chancellor plans to lay out a compelling “growth narrative,” including new economic policies, with a scheduled speech expected later this month, according to officials.
Officials said the government was determined to avoid further tax rises on top of the £40bn package it set out in October, with one saying it “would be absolutely disastrous”.
Instead, the government is looking for growth and reining in public spending A devastating rise in government borrowing costs.
Officials and ministers are bracing for possible cuts to departmental spending plans at the next spending review which, according to people familiar with the process, will be held on June 11.
As part of its pro-growth agenda, Labor plans to change the “round write-up” process by which different departments agree on collective policy making.
“Departments will be asked whether this policy will have a beneficial impact on growth, and if yes, we will do so as a broad principle,” a Treasury official said.
Meanwhile, departments will also be given a consistent message during the spending review process that if they are pushing policies that “hinder growth”, those policies should be “reconsidered”.
But economists warned that the sell-off in the gold market had exposed serious weaknesses in the party's economic and public finance strategy, and criticized the government for failing to build enough margin to make negative changes to the October budget, and for being slow on details. Growth initiatives.
“They now need to show they are serious about tackling the fiscal challenges the UK faces in a world of rising interest rates,” said Ben Nabarro, a British economist at Citigroup. “This means being able to deal with structurally weak growth. But they are also likely to be misled if they imagine that growth alone can rescue them from this fiscal gap. Some adjustments in spending and taxes are also needed.”
The Bank of England says the economy failed to grow in the final quarter of 2024, after weaker-than-expected GDP readings late last year. Business surveys have revealed a loss of confidence following tax rises in the October Budget.
The yield on 10-year government bonds ended the week at 4.85 percent, up 0.25 percentage points from the previous week. The British pound fell to $1,219It is its weakest level against the dollar since November 2023. Shares in the domestic market-focused FTSE 250 index fell 4 percent this week, the biggest decline since June 2023.
Reeves' October budget, which included a sharp increase in borrowing, fell victim to a sharp sell-off in global bond markets due to renewed concerns about inflation.
This has sent government bond yields everywhere higher, as investors bet that central banks will be slower to cut interest rates. This has mixed with investor concern about the UK economy which has pushed the country's 30-year borrowing costs to their highest levels this century.
“The higher the yields, the worse the financial situation becomes,” said Mark Dowding, chief investment officer for fixed income at RBC Bluebay Asset Management.
Strong US jobs numbers Pressure on the bond market increased on Friday, prompting traders to bet on a slower pace of interest rate cuts from the Federal Reserve. The next key moment for bonds will be next week's UK inflation numbers.
An area where Reeves will emphasize key reforms is setting out new details for a new “Planning and Infrastructure Bill” that should be introduced to the House of Commons in March and aims to speed up development.
A senior Labor MP said: “The government urgently needs to deliver a growth plan… This is more important than ever for businesses facing higher national insurance, a new package of employment rights and a higher minimum wage.”
One Labor veteran said recent opinion polls putting Labor as low as 24 per cent made him want to “bang 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 it doesn't have a coherent or even sensible narrative to sell markets, then it's doomed, right?”
Data visualization by Keith Fry
