{"id":15824,"date":"2025-02-04T08:22:12","date_gmt":"2025-02-04T08:22:12","guid":{"rendered":"https:\/\/financialrush.com\/?p=15824"},"modified":"2025-02-04T08:22:12","modified_gmt":"2025-02-04T08:22:12","slug":"spike-in-uk-borrowing-costs-raises-specter-of-public-spending-cuts","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=15824","title":{"rendered":"Spike in UK borrowing costs raises specter of public spending cuts"},"content":{"rendered":"<p> \n<\/p>\n<div xmlns:default=\"http:\/\/www.w3.org\/2000\/svg\" id=\"RegularArticle-ArticleBody-5\" data-module=\"ArticleBody\" data-test=\"articleBody-2\" data-analytics=\"RegularArticle-articleBody-5-2\"><span class=\"HighlightShare-hidden\" style=\"top:0;left:0\"\/><\/p>\n<div role=\"region\" aria-labelledby=\"Placeholder-ArticleBody-Video-108084604\">\n<div role=\"button\" tabindex=\"0\" id=\"Placeholder-ArticleBody-Video-108084604\" class=\"PlaceHolder-wrapper\" data-vilynx-id=\"7000363092\" data-test=\"VideoPlaceHolder\">\n<div class=\"InlineVideo-videoEmbed\" id=\"InlineVideo-0\" data-test=\"InlineVideo\">\n<div class=\"InlineVideo-wrapper\">\n<div class=\"InlineVideo-inlineThumbnailContainer\"><span class=\"InlineVideo-videoButton\"\/><span\/><\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"group\">\n<p>The march higher in U.K. government bond yields since the launch of the Labour government&#8217;s <a href=\"https:\/\/www.cnbc.com\/2024\/10\/30\/uk-budget-labour-rachel-reeves-october-2024.html\">debut budget plan in October<\/a> sparked widespread concern last week, as borrowing costs rose to breach numerous decade highs.<\/p>\n<p>The prospect of public spending cuts or further tax rises came into focus last week, as <span class=\"QuoteInBody-quoteNameContainer\" data-test=\"QuoteInBody\" id=\"RegularArticle-QuoteInBody-2\"><a href=\"https:\/\/www.cnbc.com\/quotes\/UK30Y-GB\/\">30-year gilt<\/a><span class=\"QuoteInBody-inlineButton\"><span class=\"AddToWatchlistButton-watchlistContainer\" id=\"-WatchlistDropdown\" data-analytics-id=\"-WatchlistDropdown\"><button class=\"AddToWatchlistButton-watchlistButton\" aria-label=\"Add To Watchlist\" data-testid=\"dropdown-btn\"><span class=\"AddToWatchlistButton-addWatchListFromTag\"\/><\/button><\/span><\/span><\/span> yields hit their <a href=\"https:\/\/www.cnbc.com\/2025\/01\/07\/uks-long-term-borrowing-costs-hit-highest-level-since-1998.html\">highest level since 1998<\/a>. Despite initially falling after Labour&#8217;s election victory in July, <span class=\"QuoteInBody-quoteNameContainer\" data-test=\"QuoteInBody\" id=\"RegularArticle-QuoteInBody-4\"><a href=\"https:\/\/www.cnbc.com\/quotes\/UK2Y-GB\/\">2-year gilt <\/a><span class=\"QuoteInBody-inlineButton\"><span class=\"AddToWatchlistButton-watchlistContainer\" id=\"-WatchlistDropdown\" data-analytics-id=\"-WatchlistDropdown\"><button class=\"AddToWatchlistButton-watchlistButton\" aria-label=\"Add To Watchlist\" data-testid=\"dropdown-btn\"><span class=\"AddToWatchlistButton-addWatchListFromTag\"\/><\/button><\/span><\/span><\/span>yields have also climbed back above 4.5%, while the 10-year yield reached levels not seen since 2008.<\/p>\n<p>Waning investor confidence in the U.K. was particularly highlighted by a concurrent fall in sterling, which on Friday hit its lowest level against the U.S. dollar since November 2023.<\/p>\n<\/div>\n<div class=\"group\">\n<p>Borrowing costs are also rising in the <a href=\"https:\/\/www.cnbc.com\/2024\/11\/28\/frances-political-chaos-drives-borrowing-costs-to-same-level-as-greeces.html\">euro area<\/a> and the <a href=\"https:\/\/www.cnbc.com\/2025\/01\/10\/us-treasury-yields-investors-await-key-jobs-data.html\">U.S.<\/a>, and economists point out that\u00a0the U.K. is being weighed on by external factors including the return of Donald Trump to the White House and expectations for broadly higher interest rates than previously expected this year.<\/p>\n<p>But the surge in U.K. yields is nonetheless a major headache for the U.K. government, which has pledged to <a href=\"https:\/\/www.cnbc.com\/2024\/12\/23\/britains-economy-saw-zero-growth-in-the-third-quarter.html\">reboot economic growth<\/a> while ensuring debt declines as a share of the economy within five years. <a href=\"https:\/\/www.ons.gov.uk\/economy\/governmentpublicsectorandtaxes\/publicsectorfinance\/bulletins\/publicsectorfinances\/november2024\" target=\"_blank\">U.K. public sector net debt<\/a> currently stands at nearly 100% of GDP.<\/p>\n<p>&#8220;The rise in gilt yields has a self-reinforcing feedback loop through the U.K.&#8217;s debt sustainability, by increasing borrowing costs used for budgeting purposes,&#8221; ING Senior European Rates Strategist Michiel Tukker said in a Friday note.<\/p>\n<p>Tukker cited analysis by the independent Office of Budget Responsibility which indicates that the recent rise in yields \u2014 if sustained \u2014 would wipe out the government&#8217;s estimated headroom of \u00a39.9 billion ($12.1 billion) for meeting its\u00a0<a href=\"https:\/\/labour.org.uk\/change\/labours-fiscal-plan\/\" target=\"_blank\">self-declared fiscal rules<\/a>. Those regulations commit Labour to covering day-to-day government spending with revenues, as well as a goal of moving toward a decline in the U.K.&#8217;s debt to GDP ratio on a longer timeframe.<\/p>\n<\/div>\n<live_story id=\"108054111\" contenturl=\"https:\/\/capi-bl-web.cnbc.com\/api\/v1\/id\/108054111\" type=\"live_story\" slug=\"UK's Labour government raises taxes by &#xA3;40 billion in new budget plan\" title=\"UK's Labour government raises taxes by &#xA3;40 billion in new budget plan\" liveurl=\"\/2024\/10\/30\/uk-budget-labour-rachel-reeves-october-2024.html\" branding=\"cnbc\" subdomain=\"https:\/\/www.cnbc.com\" url=\"https:\/\/www.cnbc.com\/2024\/10\/30\/uk-budget-labour-rachel-reeves-october-2024.html\" tagname=\"UK's Labour government raises taxes by &#xA3;40 billion in new budget plan\" contentclassification=\"\" revisionid=\"14867599\" state=\"Publish\" sectionhierarchy=\"[object Object],[object Object],[object Object]\" historicalurl=\"\" bodyteaser=\"&lt;body&gt;&lt;group&gt;&lt;subtitle&gt;&lt;\/subtitle&gt;&lt;div class=&quot;group&quot;&gt;&lt;p&gt;cscs&lt;\/p&gt;&lt;\/div&gt;&lt;\/group&gt;&lt;\/body&gt;\" iscontemplate=\"No\" datepublished=\"2024-10-30T05:59:36+0000\" datelastpublished=\"2024-10-30T20:37:08+0000\" datefirstpublished=\"2024-10-30T05:59:36+0000\" datemodified=\"2024-10-30T20:37:08+0000\" settings=\"[object Object]\" association=\"[object Object],[object Object]\" description=\"Nearly four months after taking office, the U.K.'s new Labour government unveiled its debut budget plan on Wednesday. \" headline=\"UK's Labour government raises taxes by &#xA3;40 billion in new budget plan\" shorterheadline=\"UK's Labour government raises taxes by &#xA3;40 billion in new budget plan\" section=\"[object Object]\" createdby=\"Jennifer\" editedby=\"Ryan.Browne@nbcuni.com\" seotitle=\"UK Budget: Labour's Rachel Reeves unveils plan with tax rises\" summary=\"Nearly four months after taking office, the U.K.'s new Labour government unveiled its debut budget plan on Wednesday. \" linkheadline=\"UK's Labour government raises taxes by &#xA3;40 billion in new budget plan\" publisher=\"[object Object]\" about=\"&lt;body&gt;&lt;group&gt;&lt;subtitle&gt;&lt;\/subtitle&gt;&lt;div class=&quot;group&quot;&gt;&lt;p&gt;&lt;em&gt;This was CNBC's live blog covering the October 2024 U.K. budget.&lt;\/em&gt;&lt;\/p&gt;&lt;\/div&gt;&lt;\/group&gt;&lt;\/body&gt;\" featuredcontent=\"&lt;body&gt;&lt;group&gt;&lt;subtitle&gt;&lt;\/subtitle&gt;&lt;assets&gt;&lt;asset nid=&quot;108054788&quot;&gt;&lt;\/asset&gt;&lt;\/assets&gt;&lt;div class=&quot;group&quot;&gt;&lt;p&gt;LONDON &#x2014; Nearly four months after taking office, the U.K.'s new Labour government on Wednesday unveiled a debut budget plan that includes &#xA3;40 billion ($51.8 billion) worth of tax rises to plug a hole in the public finances and allow for investment in public services.&lt;\/p&gt;&lt;p&gt;One of the changes that is expected to be among the biggest revenue-raisers for the U.K. Treasury is a hike in the amount employers pay out in National Insurance (NI) &#x2014; a tax on earnings. British Finance Minister Rachel Reeves also detailed increases to capital gains tax and private school fees, a freeze on fuel duty and the abolition of the &lt;asset_inline nid=&quot;108047825&quot;&gt;controversial &quot;non-dom&quot; tax regime.&lt;\/asset_inline&gt;&lt;\/p&gt;&lt;p&gt;A freeze on income tax and National Insurance thresholds for workers &#x2014; seen as a stealth tax by many &#x2014; was one of the surprise moves in Wednesday's announcement.&lt;\/p&gt;&lt;p&gt;Reeves also outlined a significant rise in borrowing to fund public sector investment, and committed to a higher day-to-day budget for the National Health Service and &#xA3;5 billion to fund Labour's housing plan, which includes the construction of 1.5 million homes over the course of this parliament.&lt;\/p&gt;&lt;p&gt;She repeated her claim that Labour this summer exposed a &#xA3;22 billion &quot;black hole&quot; in the previous Conservative government's spending plans, which the opposition party has previously refuted. Reeves further announced plans to catalyze &#xA3;70 billion of investment through the National Wealth Fund, the U.K.'s newly created sovereign wealth fund.&lt;\/p&gt;&lt;p&gt;Meanwhile, &lt;asset_inline ext_link=&quot;https:\/\/obr.uk\/efo\/economic-and-fiscal-outlook-october-2024\/&quot;&gt;the independent Office for Budget Responsibility released updated&lt;\/asset_inline&gt; U.K. forecasts saying real GDP growth will pick up from close to zero last year, to 1.1% this year, 2% in 2025, and 1.8% in 2026. That compares with previous forecasts for 0.8% growth in 2024 followed by 1.9% in 2025 and 2% in 2026.&lt;\/p&gt;&lt;p&gt;Reeves had faced backlash for not holding the budget closer to Labour's July 4 election win, with critics saying the delay has cast a cloud of uncertainty over the economy and businesses.&lt;\/p&gt;&lt;\/div&gt;&lt;\/group&gt;&lt;\/body&gt;\" coverageenddate=\"2024-10-30T16:40:00+0000\" relation=\"[object Object]\"\/>\n<div class=\"group\">\n<p>The Institute for Fiscal Studies think tank said Friday there is a &#8220;knife edge,&#8221; chance of the U.K. achieving the former fiscal rule, but that Finance Minister Rachel Reeves could &#8220;get lucky.&#8221;<\/p>\n<p>She otherwise faces an &#8220;unenviable set of options,&#8221; said IFS Associate Director Ben Zaranko, including bringing forward upcoming\u00a0<a href=\"https:\/\/news.sky.com\/story\/budget-2024-what-are-labours-fiscal-rules-and-could-rachel-reeves-change-them-to-raise-more-money-13231424\" target=\"_blank\">changes to how debt is calculated<\/a>\u00a0to free up more headroom, paring back current spending plans and announcing more tax rises, which could be conditional on changes within the coming years. The minister could also opt to do nothing and break her rule.<\/p>\n<p>Economists Ruth Gregory and Hubert de Barochez at research group Capital Economics also said U.K. gilts may be trapped in a &#8220;vicious circle,&#8221; in which &#8220;the rise in U.K. yields puts a strain on public finances, therefore calling for an even bigger tightening of fiscal policy, but in turn putting additional strain on the economy.&#8221;<\/p>\n<\/div>\n<div>\n<div class=\"Collapsible-proliveCollapsableContainer\" role=\"button\" tabindex=\"0\"><default:svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"256\" height=\"256\" viewbox=\"0 0 256 256\" aria-labelledby=\"title desc\" role=\"img\" focusable=\"false\" preserveaspectratio=\"xMinYMin\" class=\"Collapsible-stockChartIcon\"><default:title>Stock Chart Icon<\/default:title><default:desc>Stock chart icon<\/default:desc><default:g transform=\"translate(1.4065934065934016 1.4065934065934016) scale(2.81 2.81)\"><default:path d=\"M 87.994 0 H 69.342 c -1.787 0 -2.682 2.16 -1.418 3.424 l 5.795 5.795 l -33.82 33.82 L 28.056 31.196 l -3.174 -3.174 c -1.074 -1.074 -2.815 -1.074 -3.889 0 L 0.805 48.209 c -1.074 1.074 -1.074 2.815 0 3.889 l 3.174 3.174 c 1.074 1.074 2.815 1.074 3.889 0 l 15.069 -15.069 l 14.994 14.994 c 1.074 1.074 2.815 1.074 3.889 0 l 1.614 -1.614 c 0.083 -0.066 0.17 -0.125 0.247 -0.202 l 37.1 -37.1 l 5.795 5.795 C 87.84 23.34 90 22.445 90 20.658 V 2.006 C 90 0.898 89.102 0 87.994 0 z\" transform=\" matrix(1 0 0 1 0 0) \" stroke-linecap=\"round\"\/><default:path d=\"M 65.626 37.8 v 49.45 c 0 1.519 1.231 2.75 2.75 2.75 h 8.782 c 1.519 0 2.75 -1.231 2.75 -2.75 V 23.518 L 65.626 37.8 z\" transform=\" matrix(1 0 0 1 0 0) \" stroke-linecap=\"round\"\/><default:path d=\"M 47.115 56.312 V 87.25 c 0 1.519 1.231 2.75 2.75 2.75 h 8.782 c 1.519 0 2.75 -1.231 2.75 -2.75 V 42.03 L 47.115 56.312 z\" transform=\" matrix(1 0 0 1 0 0) \" stroke-linecap=\"round\"\/><default:path d=\"M 39.876 60.503 c -1.937 0 -3.757 -0.754 -5.127 -2.124 l -6.146 -6.145 V 87.25 c 0 1.519 1.231 2.75 2.75 2.75 h 8.782 c 1.519 0 2.75 -1.231 2.75 -2.75 V 59.844 C 41.952 60.271 40.933 60.503 39.876 60.503 z\" transform=\" matrix(1 0 0 1 0 0) \" stroke-linecap=\"round\"\/><default:path d=\"M 22.937 46.567 L 11.051 58.453 c -0.298 0.298 -0.621 0.562 -0.959 0.8 V 87.25 c 0 1.519 1.231 2.75 2.75 2.75 h 8.782 c 1.519 0 2.75 -1.231 2.75 -2.75 V 48.004 L 22.937 46.567 z\" transform=\" matrix(1 0 0 1 0 0) \" stroke-linecap=\"round\"\/><\/default:g><\/default:svg><\/p>\n<div class=\"Collapsible-proLivePlayerCloseOrExpand\"><img decoding=\"async\" src=\"https:\/\/static-redesign.cnbcfm.com\/dist\/a54b41835a8b60db28c2.svg\" class=\"Collapsible-dismissButton\" alt=\"hide content\"\/><\/div>\n<\/div>\n<p><iframe title=\"Pound vs dollar.\" src=\"https:\/\/www.cnbc.com\/appchart?symbol=GBP%3D&amp;range=1M&amp;type=line&amp;embedded=true&amp;$DEVICE$=undefined\" height=\"460\" scrolling=\"no\" style=\"border:0;width:100%\"><\/iframe><\/p>\n<p>Pound vs dollar.<\/p>\n<\/div>\n<div class=\"group\">\n<p>Bank of America Global Research strategists on Friday said that it was unlikely Labour would breach its rules and would instead announce further fiscal consolidation \u2014 measures to reduce public debt, generally public spending cuts or tax hikes \u2014 in the spring or earlier.<\/p>\n<p>That would potentially be achieved through spending cuts, they added, coming off the back of the <a href=\"https:\/\/www.cnbc.com\/2024\/10\/30\/uk-budget-labour-rachel-reeves-october-2024.html\">\u00a340 billion in tax hikes <\/a>that Labour announced in October.<\/p>\n<p>A Treasury spokesperson told CNBC: &#8220;This Government&#8217;s commitment to fiscal rules and sound public finances is non-negotiable.&#8221;<\/p>\n<p>&#8220;The Chancellor has already shown that tough decisions on spending will be taken, with the spending review to root out waste ongoing. And over the coming weeks and months, the Chancellor will leave no stone unturned in her determination to deliver economic growth and fight for working people.&#8221;<\/p>\n<\/div>\n<h2 id=\"uk-in-slow-growth-trap-but-not-a-mini-budget-crisis\" class=\"ArticleBody-subtitle\"><a id=\"headline0\"\/>UK in &#8216;slow growth trap&#8217; \u2014 but not a mini-budget crisis<\/h2>\n<div class=\"group\">\n<p>Former U.K. Finance Minister Vince Cable told CNBC on Friday that higher bond yields were being seen in many countries and were not an &#8220;emergency panic situation&#8221; \u2014 but that markets had realized Britain was stuck in a &#8220;slow growth trap.&#8221;<\/p>\n<p>&#8220;We&#8217;ve been there for many years, since the Financial Crisis, then Brexit, then a problem with Covid[-19] and Ukraine war, and we&#8217;re stuck with relatively high inflation, very slow growth, and so the markets are marking the U.K. down, relatively speaking. But this is not a panic situation, it&#8217;s not a crisis of the old-style balance of payment sell-off situation,&#8221; Cable said.<\/p>\n<p>Labour should have gone for a broader range of tax rises rather than focusing on a hike in National Insurance \u2014 a levy on wages \u2014 which has been <a href=\"https:\/\/www.cnbc.com\/2025\/01\/06\/uk-business-confidence-at-lowest-level-since-mini-budget-bcc.html\">slammed by the U.K. business community<\/a>, Cable said. However, he added that the market has broader concerns over U.K. growth and the global economic picture, which is clouded by external factors, such as the weaker Chinese outlook.<\/p>\n<\/div>\n<div class=\"ArticleBody-cnbcNewsStory\"><a href=\"https:\/\/www.cnbc.com\/2024\/12\/23\/britains-economy-saw-zero-growth-in-the-third-quarter.html\"><img decoding=\"async\" src=\"https:\/\/image.cnbcfm.com\/api\/v1\/image\/108063216-1731601889272-gettyimages-2183863696-20241106_city_skyline_mist_002.jpeg?v=1734943164&amp;w=160&amp;h=90\" alt=\"Bank of England in the City of London on 6th November 2024 in London, United Kingdom. The City of London is a city, ceremonial county and local government district that contains the primary central business district CBD of London. The City of London is widely referred to simply as the City is also colloquially known as the Square Mile. (photo by Mike Kemp\/In Pictures via Getty Images)\"\/><\/a><\/p>\n<div class=\"ArticleBody-cnbcNewsStoryHeader\"><a href=\"https:\/\/www.cnbc.com\/2024\/12\/23\/britains-economy-saw-zero-growth-in-the-third-quarter.html\">Britain&#8217;s economy flatlined in the third quarter, revised figures show<\/a><\/div>\n<\/div>\n<div class=\"group\">\n<p>Cable also downplayed comparisons with the <a href=\"https:\/\/www.cnbc.com\/2024\/11\/21\/britains-mini-budget-disaster-should-serve-as-a-warning-to-the-us.html\">U.K. mini-budget crisis in 2022<\/a>, when then-Prime Minister Liz Truss&#8217;s announcement of sweeping tax cuts triggered massive volatility in the bond market.<\/p>\n<p>&#8220;The Truss moment was a prime minister just taking a reckless leap into the dark with a big increase in the budget deficit on the assumption this will somehow trigger economic growth. Well, that clearly isn&#8217;t what&#8217;s happened this time. The argument is about whether they&#8217;ve done enough tightening and whether they&#8217;ve done it in the right way, but it&#8217;s a different kind of problem,&#8221; Cable told CNBC.<\/p>\n<p>That sentiment was broadly reflected in wider analysis. Bank of America strategists called comparisons with the mini-budget &#8220;overblown,&#8221; noting that the bar for the Bank of England to intervene in the gilt market, as it did at the time, was high.<\/p>\n<p>Capital Economics said last week&#8217;s higher gilt yields were an economic headwind but not a crisis, with smaller and slower moves than after the mini-budget. David Brooks, head of policy at consultancy Broadstone, said there did not appear to be any &#8220;systemic issues at play&#8221; in the <a href=\"https:\/\/www.cnbc.com\/2022\/10\/06\/bank-of-england-says-pension-funds-were-hours-from-disaster-before-it-intervened.html\">liability-driven investment (LDI) funds, which were the biggest concern back in 2022<\/a>.<\/p>\n<\/div>\n<\/div>\n\n<br \/><a href=\"https:\/\/www.cnbc.com\/2025\/01\/13\/uk-borrowing-costs-at-decade-highs.html\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"The march higher in U.K. government bond yields since the launch of the Labour government&#8217;s debut budget plan&hellip;\n","protected":false},"author":4,"featured_media":12098,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[],"class_list":["post-15824","post","type-post","status-publish","format-standard","has-post-thumbnail","category-markets","cs-entry","cs-video-wrap"],"_links":{"self":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/15824","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15824"}],"version-history":[{"count":0,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/15824\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/media\/12098"}],"wp:attachment":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15824"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15824"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15824"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}