Rachel Reeves defends Labour against bond market selloff
Chancellor Rachel Reeves has launched a defence of Labour’s economic record and blamed her Tory predecessors for the mass selloff in the gilt market despite growing criticism of the government’s fiscal policies.
In a parliamentary session before MPs, Reeves said the government had made “fully funded and fully costed” plans to support its £190bn splurge on public services, with billions more set aside for infrastructure spending over the next ten years.
She said the UK government was paying less in debt interest than Greece given its spread on gilts above Bank Rate was lower, though AJ Bell analysts highlighted on Monday that 10-year debt had now become more costly than in several European countries.
“The truth is that we have had five cuts in interest rates since this government came to office.
“We are paying high levels of interest on the debt but the debt was accrued by the [Tories] who destroyed our economy and public services all at one” Reeves said.
“We are fixing the mess that they left.”
Reeves said the government had a “grip on the public finances”, claiming that the Tory opposition were “talking down our economy”.
Ten-year gilt yields hovered around 4.62 per cent by Tuesday lunchtime while the 30-year bond yield continued to fall as it slipped below the 5.5 per cent mark.
The ten-year yield had climbed above 4.8 per cent last week while the 30-year yield neared 5.7 per cent, with bond traders slamming the government’s fiscal policies in light of market turmoil in France and the US.
AJ Bell investment director Russ Mould said on Monday that traders were worried about “mounting government debt” and high inflation, prompting them to demand higher yields on longer-term bonds.
“In the end, if the supply of something goes up enough, its price will have to go down to stimulate demand and this is what is happening with long-dated gilts, since their price moves inversely to their yield,” Mould said.
“The result is that it now costs the UK government more to issue 10-year debt than any of Portugal, Ireland, Italy, Greece and Spain, the so-called ‘PIIGS’ whose sovereign borrowings caused such angst in the early 2010s and attracted so much criticism for the supposedly feckless policies that had contributed to them.”
Rachel Reeves’ showdown with backbenches
Leading economists have hit out at Labour backbenchers who oppose government plans to reduce spending on welfare.
Former Institute for Fiscal Studies (IFS) director Paul Johnson said the parliamentary Labour party suffered from “multiple delusions” as he blamed them for leaving Reeves with “less sway” over policy decisions.
“The only route to controlling the deficit, then, is through tax increases,” Johnson wrote in an article for the think tank UK in a Changing Europe.
“However the even bigger delusion suffered by so many of Reeves’ colleagues is that tax increases substantial enough to deal with the fiscal problems can be achieved through some form of wealth tax, tax on banks, tax on the rich, anything that looks like a victimless tax.
“The reality is, if they want more spending on welfare and public services, and they want economic growth, they are going to have to get serious about broad-based tax increases.”