Reeves ‘in a tight spot’ over latest long-term borrowing cost figures, economists warn
Rachel Reeves has been warned she is in a “tight spot” after new figures on the UK’s long-term borrowing costs emerged today.
Economists signalled the Chancellor would be forced to hike taxes and cut spending if the outlook continued on its current trajectory.
The UK’s long-term Government borrowing costs have lifted to their highest level since 1998 with the yield on 30-year gilts – the return on Government bonds – increasing on Tuesday by four basis points to 5.22 per cent, surpassing the spike seen in 2023.
Gilts are loans the UK Government borrows from investors and promises to repay with interest.
Investors are said to be concerned sluggish growth could throw the UK economy into a period of “stagflation”, where the Bank of England cannot cut interest rates to help the economy.
Edward Jones of Bangor University told The i Paper: “It’s a tricky one for Rachel Reeves. It puts her in a tight spot – she didn’t leave herself much room for manoeuvre after the Budget.
“I can understand the narrative from investors and their view of sluggish growth given how businesses have responded to the Budget by upping prices and with inflation figures stuck.
“Trump is also taking office soon… there is a lot of uncertainty around the world.
“Where investors want to put their money is in safe havens. There will be less appetite for gilts in other countries and that’s playing out here as well.
“We’re in a waiting game. We’re waiting for official figures to get a better understanding of the room Reeves has.
“It’s very difficult to say when we will reach a period of certainty. We need to take that into account now for future Budgets.
“Uncertainty will be a theme for 2025 – something investors hate as they don’t know how to invest with this.
“If this does put a squeeze on Reeves, there could be a tax increase in the next Budget to cover the shortfall.”
Robert Wood of Pantheon Macroeconomics also offered a downbeat assessment for the Chancellor.
He suggested the Treasury would have to increase taxes if gilt yields were sustained at their current levels.
He told The i Paper: “Ms Reeves would find the headroom against her fiscal rules completely wiped out if gilt yields remain at their current level.
“What’s more, remember that headroom assumed a large increase in fuel duty next April—the reversal of the 5p ‘emergency cut’ and inflation indexing—and tight government spending plans in the medium-term.
“There was also no allowance for substantially higher defence spending that will likely be required in the coming years.
“Ms Reeves would have to hike taxes more or cut spending if gilt yields are sustained at their current levels, and the Chancellor will have yet more work to do if the Government wishes to beef up defence spending or protect motorists from fuel duty hikes.”
