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The UK government was in something of a dilemma. As the cost of borrowing has risen since the fall, the chances of meeting the key self-imposed fiscal rule – borrow to invest only by the end of the decade – have diminished. This setback was met with violent statements by the government. Whether it's from Prime Minister Sir Keir Starmer, Rachel Reeves, his advisor, or their spokespeople, the adjectives used to describe fiscal rules tend to confuse “armored“and”Non-negotiable“. Their position is always”Completely committed“.
Sentiment in UK government bond markets has improved over the past week, but many are not yet convinced. Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, was no less impressed, saying government bonds could trend “Death spiral“Of course, this was an exaggeration, but his comments reflect broader concern in financial markets about a gap between tough fiscal rhetoric and the reality of budget policy in the UK – a gap that long predates the current Labor government.
So what is needed to provide budget stability on which the rest of the UK economy can build is simple. No more rhetoric. No more announcements of fiscal policy tightening either now or at some point in the future. Instead, Reeves needs to implement the tax increases and spending plans outlined in October without any concessions on when they are scheduled to take effect in April.
This is great. Alongside the huge and chaotic increase in employers' national insurance, there are continuing increases in income tax in the form of frozen benefits, a far cry from lavish increases in public spending. measures together Set to limit Government borrowing is significant. The overall deficit is expected to decline from 4.5 percent of GDP in 2024-25 to 3.6 percent in 2025-26, while the current budget deficit, excluding capital investment, is set to halve from 2 percent of GDP to 0.9 percent. During the same period.
This will be an exercise in showing, not telling. A borrowing cut of this magnitude is reasonably rare for UK governments – it will become clear by the summer whether Reeves and her policies are on the right track. Success would immediately demonstrate the difference between the UK's fiscal policy and those of similar countries.
In recent years, US administrations have shown their inability to manage a deficit much less than 6% of GDP. There is no improvement in sight. The European Commission expects the deficit to be in the French budget It exceeded 6% of GDP Last year, with little prospect of a political agreement achieving much improvement. Germany's core public finances are strong, but its economy is weak. Debt levels in the UK, although high, remain well below those in Italy.
Bond markets often have a say of their own, but it would be difficult to single out the UK especially if it were the only developed country of decent size with the ability to pass and actually implement the legislation needed to enforce fiscal consolidation. That's what Reeves should do. If growth is hit, the Bank of England will be in a strong position to ease monetary policy and offset fiscal tightening.
There are no guarantees in convincing financial markets that they have more to lose if they bet against you. The UK government must also hope that consumers will start spending their recent gains in real income and improving growth. It must demonstrate that any expansion will come with some recovery in productivity growth. and that increases in employers' National Insurance should not have a more damaging impact on jobs and prices than already anticipated.
Nothing will be achieved by more rhetoric about non-negotiable commitments to strict financial rules.
