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Distrust of the British economy has become contagious. From companies, it has now spread to financial markets. Last week, investors dumped government bonds and sold sterling, as concerns mounted about the UK's fiscal sustainability. Ten-year government bond yields are near 16-year highs. If they do not back down, the “tight” fiscal rule imposed by Chancellor Rachel Reeves – to balance the current budget within five years – will be breached. In order to restore its credibility, the Labor government must quickly detail credible plans to increase economic growth and rein in spending.
The recent sell-off in bonds has been triggered by developments in the United States. High inflation expectations in the world's largest economy — tied to President-elect Donald Trump's tariff agenda and strong economic data — have pushed up Treasury yields, the global borrowing benchmark. This has raised concerns about debt sustainability in other economies. But negative chatter about Britain's “stagflationary” growth outlook, in the wake of last October's tax-hiking Autumn Budget, and the limited room left by Reeves against its fiscal rules, has made the UK a prime target for bond vigilantes.
What can the government do? Unless revenues start spiraling out of control, knee-jerk announcements to cut costs or increase revenues now could spark desperation and possibly push yields higher. Bond yields ebb and flow, and the current sell-off has been anything but disorderly. Comparisons with the market panic sparked by former Prime Minister Liz Truss's “mini” Budget in September 2022 are far from true.
But doing nothing is not an option either. Trump's volatility means global bond markets will remain risky. The message to investors is that their confidence in Britain's ability to cut costs and increase growth in this volatile environment is very low. The work must then embody it Economic strategyInstead of talking vaguely about future efficiency savings and enhanced growth. Businessmen and investors want to know how Britain's prospects will improve meaningfully in the near term.
This means that the government must Redouble efforts To remove barriers to employment, investment and business expansion. Plans Announced on Monday Creating “growth zones” for AI is a start. But companies also want to know how the announced reforms to the planning system will speed up construction across the country.
The industrial strategy – planned for the spring – is also there An opportunity to motivate Confidence by identifying a range of key infrastructure projects and ambitious plans to improve access to highly skilled talent. Reeves could set out his intentions on tax breaks and simplification before the Autumn Budget, which will be the main fiscal event this year. This can help stimulate business appetite.
However, bond traders will be looking for evidence of an improvement in Britain's fiscal position in the near term as well. The Finance Minister is right to rule out further tax increases, which could 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 lock on pension payments. Indeed, if fiscal accounts do not improve significantly, the Government may make cuts to feed into the Office for Budget Responsibility's next forecast on 26 March.
Rising bond yields are a wake-up call. Labor should keep calm and avoid hasty announcements, but it cannot continue in the slow and ambiguous way it has begun. It is time for the government to articulate – with passion and detail – its strategy for achieving growth and cutting costs.
