Chancellor Rachel Reeves looks for pro-growth measures amid market tumult
Rachel Reeves has asked cabinet colleagues to draw up new pro-growth policies, reports suggest, following turmoil in the bond market this week.
Gilt yields, which reflect the cost of government borrowing, have marched higher, reflecting both global bets on higher interest rates and concerns about the Chancellor’s fiscal plans.
Earlier this week, the yield on the 30-year gilt hit its highest level since 1998, while the 10-year gilt rose to its highest level since 2008.
According to the Times, Reeves has asked ministers to come up with concrete measures to boost growth and “cease anti-growth measures”. She is expected to make a speech on the economic outlook in the coming weeks.
Economic momentum in the UK has ground to a halt since Labour’s election, with the economy unexpectedly contracting for a second consecutive month in October.
The increase in gilt yields will add a further headwind to growth in the coming months because they act as a benchmark for lending in the rest of the economy.
Combined with worries that the government’s Budget will push up inflation, this has raised fears that the UK might be facing stagflation – high inflation and low growth.
Most economists also think that higher gilt yields will force Reeves to hike taxes or cut spending again this year in order to meet her fiscal rule, which requires tax receipts to meet day-to-day spending.
If it persists, the upward march in gilt yields will add around £10bn – £12bn to the government’s debt interest bill, according to analysts, enough to wipe out the buffer Reeves left against the fiscal rules in October.
Speaking in the parliament yesterday, Darren Jones, the Treasury chief secretary, said meeting the fiscal rules was “non-negotiable”.
Michael Brown, senior research strategist at Pepperstone, said markets were looking for a “firm commitment” to further spending cuts or tax rises. However, he noted that such measures could “further dent the UK’s already anaemic economic growth”.