The Chancellor could be forced into further tax increases or reductions in spending plans to comply with UK financial rules because of a rise in the cost of the government borrowing money, economists have warned.
Government borrowing costs have reached their highest level in nearly 17 years on Wednesday, as the bond market continues to decline and investors become increasingly concerned about the risk of stagflation.
The rise in the cost of servicing government debt could eat into Labour's expected financial leeway, signalling potentially worrying implications for how investors view the UK's fiscal stability.
This too has resulted in a downturn in the value of the pound, which fell to its lowest point since last April.
We made it extremely clear why it's so crucial to manage the public finances in order to tackle the £22 billion black hole in the public finances, because having stability in the public finances is a precursor to having economic stability and economic growth.
Fell by up to 1.1% to 1.233 against the dollar on Wednesday.
The yield on the benchmark 10-year UK Government bond, which shows the cost of the government borrowing money, rose by approximately 12 basis points to a high of 4.81%.
It was the highest reading since the financial crisis of 2008.
The increase in gilt yields has a reverse impact on the price of these government bonds, which dropped on Wednesday as a result.
The cost of borrowing over a longer period continued to rise, with the yield on 30-year government bonds reaching its highest level since 1998.
They rose sharply to a high of 5.36%, an increase of about 10 basis points.
might propose an import tax plan that would lead to higher living costs for numerous countries across the globe.
US Treasury yields also moved firmly upwards on Wednesday, with the 10-year yield rising to 4.69% – its highest since April last year.
These comments arrived amid news of the US economy's resilience raising concerns about further reductions to interest rates.
In the UK, the rise in yields came as the Debt Management Office (DMO) sold £4.25 billion of notes on Wednesday, having previously sold £2.25 billion a day before.
Last year, the DMO stated its intention to sell approximately £296.9 billion in gilts across the 2024-25 financial year.
A growing burden on the Treasury's ability to increase public spending, against the backdrop of potentially higher interest costs.
Ms Reeves was left with only £9.9 billion of scope to meet her adjusted budget requirements. This was despite a £40 billion package of tax rises to support increased spending.
Rising debt interest costs might force the Chancellor to reduce spending or increase revenue more significantly in order to meet the fiscal targets.
Kallum Pickering, Chief Economist at Peel Hunt brokerage, stated: “If bond yields continue to rise, Reeves may be compelled to make the economically detrimental decision of further increasing taxes or implementing cutbacks on planned public expenditure to balance the accounts.”
The Chancellor has committed to having a single major tax change occurring only once a year.
She has promised to leave "no stone unturned" in her determination to bring about economic growth and fight for workers who are part of the UK workforce.
"He will have iron control over the public finances,” a spokesperson said.
“UK debt stands as the second lowest among the G7 countries, and only the OBR’s projections can precisely forecast how much room for manoeuvre the government will have - anything else is based on speculative ideas.”
The Prime Minister's official spokesman stated: "I won't be getting ahead of myself... It's for the Office for Budget Responsibility to produce their forecasts, and they'll do so in the usual manner at the spring statement."
“When the Government took office, we firmly stated the significance of managing the public finances properly to address the £22 billion deficit, as having fiscal stability is a prerequisite for overall economic stability and growth.”
Shadow Chancellor Mel Stride alleged the Chancellor's budget and borrowing proposals are "making it more expensive for the Government to borrow".
"We should be creating a more secure economy, not increasing taxes to compensate for financial carelessness," he wrote on a post on X.
“Labour's choice to keep debt continuing to rise to an ever greater extent leaves us exposed even to minor fluctuations in market conditions.”
Michiel Tukker, senior European rates strategist at ING, noted that it might take a while before borrowing costs start to decrease further.
He said: "A multitude of factors contributed to the further rise, including Labour's spending aspirations, ongoing inflation issues, higher US interest rates and supply chain hurdles."
We still anticipate gilt yields to fall further later this year, but as long as these influences persist, a shift in direction will likely take some time.
Meanwhile, Lord Gus O'Donnell, who served as cabinet secretary during the premierships of Blair, Brown, and Cameron, stated that the current Number 10 would benefit from "more intellectual weight" and "economic expertise" in addressing the Spending Review.
“They are going to have to be very strict with their spending. This is going to be a quite harsh Spending Review. There are going to be lots of departments who will be unhappy... but it's achievable," he told LBC's Tonight with Andrew Marr show.
Iraqi MP Asked if he believed Downing Street had the intellectual heft to deal with the review, he said: “The answer is no, and it’s very clear. Who in No 10 has done a Spending Review before? I don’t know of anybody.
“So, yes, they need more intellectual weight. They need more economic expertise.”
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