Her Finance Minister, Rachel Reeves, came to the government promising a development miracle, economic security and stability in public finances. Six months later, and selling the British leads her plan to disband. As Bloomberg reports, Reeves, the first female minister in the 800-year history of this position, struggles to maintain confidence in financial markets, as Britain becomes the focus of a global bond selloff. CORVERSE Despite the fact that she and Prime Minister Kir Starmer made the “financial responsibility” slogan of last year’s election campaign that contributed to the emergence of the first Labour government for 14 years, they have been affected by a turmoil of investors that raises borrowing costs and threatens with a loop on public finances. The performance of the 10-year state bond increased this week to the highest level since 2008 and the sterling retreated to the weakest level for over a year. The increase in yields, if it continues, will lure the economy, undermining the “talk about growth” said to be planning Reeves over the next few weeks to correct the narrative. “The danger now is to be irrevocably diverted from their course because they have lost control of the fiscal position, and to be forced into austerity and tax increases,” said Eric Britton, a former Bank of England economist who now runs Fathom Consulting. “They could survive for a few years, but that would be the end. In the next election they would become the subject of a crash.” CORVERSE Reeves pays the price for giving herself a much smaller “breath” than her main budgetary targets. She left a little less than £10 billion margin in her budget in October, which has now almost evaporated due to higher debt interest payments accompanying the increase in lending costs. Even if markets calm down and reverse their course, this episode means that the threat of a reaction will hang over any fiscal move in the future. “She is in a major problem,” said Helen Thomas, adviser to former Minister George Osborne and CEO of BlondeMoney, a macroeconomic advisory company. “Must come to the fore”. This image is far from the image Reeves wanted to portray as Minister of Finance, after having carefully presented herself as a figure of stability in favour of business and development, which would have a “iron grip” on public finances. Instead, not unlike her immediate conservative predecessor Jeremy Hunt, who was forced to announce an emergency package after Liz Trass’ notorious mini budget in late 2022, is under pressure for new spending cuts or tax increases. From an economic point of view, it was a disastrous start for Labour. Growth has been braked by their victory in July, inflation remains alarming and the business climate has retreated after raising taxes by more than £40 billion in October. No trust The destruction of bonds this week is different from the huge disaster caused by Trass, as this time the causes are in the US rather than purely domestic developments in the UK. But they are linked to a key element: trust. At present, investors have decided that they have no confidence in Reeves’ plans to achieve the growth needed to address the volume of national debt, which at a high of 60 years near 100% of GDP, or to address persistent inflation. The market sale, which has also hit bond yields and the currency, suggests that the UK is experiencing a capital flight, as happened before the sterling crisis in 1976. Part of the problem is Britain’s dependence on foreign funding to pay its expenses. This dependence on the so-called “ganeydom of foreigners” has become a fault and only a reliable plan can stabilise things. “Generally, the market is simply very cautious about the government’s ability to finance this largest budget deficit,” said Nora Zedivani, a global economist of JPMorgan Chase on Bloomberg television. “In the next two months they will surely have to go out with some announcements if this pressure continues to increase”. The turmoil came at an inappropriate time for Reeves, as she begins a visit to China, where she seeks to deepen ties with the world’s second largest economy. Britain’s two largest opposition parties said it should cancel the visit to address the fiscal situation, but this continues. The market slippage also came ahead of a speech that Reeves is expected to deliver in the following weeks on her key economic vision for the year. Instead, the audit focuses on how to reconstruct the financial margin and Reeves must find up to £12 billion, according to Bloomberg Economics. It can increase taxes, reduce state spending, cut social welfare, limit its investment plans or let the loan increase. But Labour have promised to end austerity in public services, such as health and justice, and Reeves ruled out direct tax increases after reactions against the October budget. Her financial rules are “unnegotiable,” she says. At present, Labour signal that public services will be under pressure, but this risks not having credibility and failing to reassure the markets. A Finance Ministry spokesman said that no one can know what the budget deficit will be until the Budget Responsibility Office forms its next forecasts in March. Until then, anything else is “pure speculation,” said the spokesman. BlondeMoney’s Thomas, however, says the Treasury Department cannot afford to delay the response for two months. “You have just been told by the market that your plan is not working well or that it is a plan that will cost you much more money, so you should change your plan,” he said. To make things worse, ejecting the government’s borrowing costs over the last few weeks will also burden growth, further complicating Reeves’ efforts to comply with its budgetary rule, according to which daily spending must be paid by taxes. The highest interest rates, if remaining, could reduce nearly 0.3 percentage points from GDP growth in 2025, according to Bloomberg Economics’ SHOK model. Reeves’ main initiatives – such as reforming planning rules to encourage housing construction and infrastructure projects and strengthening public sector capital spending in the hope of attracting more private money – are not expected to boost growth for at least a few years, while facing difficult political and fiscal challenges now. Finally, how much it will achieve these goals will determine whether it will survive politically.
Britain: The sale of bonds and the fall of sterling “scan” the work of Finance Minister Rachel Reeves
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