The rise in British government bond yields since the launch of the Labor government's first budget plan in October sparked widespread concern last week, as borrowing costs rose beyond their highest levels in decades.
The possibilities of cutting public spending or increasing taxes became more apparent last week 30 gilded years Yields reached their highest level since 1998. Although they initially fell after Labour's election victory in July, they 2 years gilded Yields also rose again above 4.5%, while the 10-year bond yield reached levels not seen since 2008.
The decline in investor confidence in the UK was particularly highlighted by the concurrent decline in the pound sterling, which on Friday reached its lowest level against the US dollar since November 2023.
Borrowing costs are also rising in the euro zone and the United States, and economists point out that the United Kingdom is being affected by external factors, including the return of Donald Trump to the White House and expectations that interest rates will be broadly higher than previously expected this year.
But the rise in UK revenues nonetheless poses a major headache for the UK government, which has pledged to revitalize economic growth while ensuring debt as a share of the economy falls within five years. Net public sector debt in the UK currently stands at nearly 100% of GDP.
“The rise in government bond yields has a self-reinforcing feedback loop through the sustainability of UK debt, by increasing borrowing costs used for budgetary purposes,” Michel Tucker, chief European interest rates strategist at ING, said in a note on Friday.
Tucker cited analysis by the Independent Office for Budget Responsibility suggesting the recent rise in revenues — if sustained — would eat away at the government's estimated £9.9 billion ($12.1 billion) of room to meet its self-declared fiscal rules. These regulations commit Labor to covering day-to-day government spending with revenue, as well as aiming to move towards a lower UK debt-to-GDP ratio over a longer time frame.
The Institute for Fiscal Studies said on Friday there was a “knife-edge” chance of the UK achieving the previous fiscal rule, but Finance Minister Rachel Reeves may be “lucky”.
Otherwise, it faces “an unenviable set of choices,” said Ben Zaranko, associate director of the IFS, including rolling out upcoming changes to how debt is calculated to make more room, scaling back current spending plans and announcing more tax hikes, which could… It is conditional on reducing debt. Changes over the coming years. The Minister can also choose to do nothing and break her rule.
Economists Ruth Gregory and Hubert de Barroches of research group Capital Economics also said UK Treasuries may be trapped in a “vicious cycle”, where “higher UK yields put pressure on public finances and thus call for a greater tightening of fiscal policies”. Politics, but in return puts additional pressure on the economy.”
Pound against dollar.
Bank of America Global Research strategists said on Friday that Labor was unlikely to break its rules and would instead announce further fiscal consolidation — measures to reduce public debt, reduce overall public spending or raise taxes — in the spring or earlier.
This is likely to be achieved through spending cuts, they added, on the back of the £40bn tax rises announced by Labor in October.
“This government's commitment to sound fiscal and fiscal rules is non-negotiable,” a Treasury Department spokesperson told CNBC.
“The Chancellor has already shown that tough decisions will be made on spending, with the Spending Review continuing to eliminate waste. Over the coming weeks and months, the Chancellor will leave no stone unturned in her determination to deliver and fight for economic growth.” Working people.”
The UK is in a 'slow growth trap' – but not a small budget crisis
Former British finance minister Vince Cable told CNBC on Friday that rising bond yields were being seen in many countries and it was not a “panic emergency” — but that markets had recognized that Britain was stuck in a “slow growth trap.”
“We've been there for many years, since the financial crisis, then Brexit, then the Covid problem and the Ukrainian war, and we're stuck with relatively high inflation, very slow growth, so the markets and that means… “Down in the UK, relatively speaking, but this is not a panic, this is not an old-fashioned balance of payments crisis.”
Cable said Labor should have moved towards a broader range of tax rises rather than focusing on increasing National Insurance – a tax on wages – which has been criticized by the UK business community. However, he added that the market has broader concerns about UK growth and the global economic picture, which are clouded by external factors, such as a weaker Chinese outlook.
Cable also played down comparisons with the UK's mini-budget crisis in 2022, when then-Prime Minister Liz Truss' announcement of sweeping tax cuts led to massive bond market volatility.
“The Truss moment was like a prime minister taking a reckless leap into the dark with a huge increase in the budget deficit on the assumption that this would somehow lead to economic growth. Well, that's clearly not what happened this time. The debate is about what happened,” Cable told CNBC. “Whether they've tightened enough and whether they've done it the right way, but it's a different kind of problem.”
This sentiment was widely reflected in the broader analysis. Strategists at Bank of America described the mini-balance sheet comparisons as “exaggerated,” noting that the bar for the Bank of England to intervene in the gold market, as it did at the time, was high.
Capital Economics said the rise in government bond yields last week was an economic headwind but not a crisis, with moves smaller and slower than after the mini-budget. David Brooks, head of policy at consultancy Broadstone, said there did not appear to be any “impacting systemic issues” in liability-based investment funds, which were the biggest concern in 2022.
