Rachel Reeves denied the economy is ‘broken’ today as she vowed to keep a lid on government spending amid fears of a financial crisis.
The Chancellor attempted to calm markets by stressing her fiscal rules after interest rates on UK gilts crept up again this morning – having spiked to 27-year highs yesterday.
The grim moves have fuelled questions over how Ms Reeves will service the country’s debt mountain. She confirmed today that the Budget will be held on November 26, later than many had anticipated.
In a video message this morning, Ms Reeves defended her handling of UK plc but acknowledged people were suffering.
‘There’s more to do. Cost of living pressures are still real,’ she said. ‘And we must bring inflation and borrowing costs down by keeping a tight grip on day-to-day spending through our non-negotiable fiscal rules. It’s only by doing this can we afford to do the things we want to do.’
Interest rates on 30-year gilts subsided following the news, in a relief for the Treasury.
Ms Reeves’ Tory predecessor Ken Clarke has been among those raising concerns that a financial crunch is ‘much nearer’ than the government is admitting.
He suggested it is not impossible that Britain will be forced to go to the IMF for help – something that Callaghan’s Labour government did during the Sterling crisis in 1976.
But Tories have cautioned that ‘damaging uncertainty’ cannot be allowed to continue for another three months.
Economists have also been warning that Ms Reeves cannot rely on tax hikes alone to fill a black hole in the books that could be as much as £40billion or £50billion.
Many believe ramping up the burden on Brits further would only suppress growth and create a ‘doom loop’ where taxes need to be increased again.
Although government borrowing rates around the world have been surging, the UK is seen as particularly badly hit – partly because inflation is running higher here.
Yields on 30-year UK bonds, known as gilts, leapt to 5.7 per cent yesterday, the highest level since 1998 in the wake of Keir Starmer’s reshuffle seen as sidelining Ms Reeves.
The rate went up again in early trading this morning reaching 5.75 per cent, before easing slightly on the Budget date announcement and Ms Reeves’ comments.
Investors are betting that more bonds will need to be issued to finance further borrowing.
The Chancellor said the economy is ‘not working well enough’ and there is ‘more to do’.
In a video on X, the Chancellor said:
‘Britain’s economy isn’t broken. But I know it’s not working well enough for working people.
‘Bills are high. Getting ahead feels tougher. You put more in, get less out. That has to change.’
She said that ‘fixing the foundations’ has been her mission for the past year and touted Government action including trade deals with the US, India and the EU and making a start on tearing up planning rules to reach the target to build 1.5million homes…
‘If renewal is our mission and growth is our challenge. Investment and reform are our tools. The tools to building an economy that works for you – and rewards you. More pounds in your pocket. An NHS there when you need it. Opportunity for all.
‘Those are my priorities. The priorities of the British people. And it is what I am determined to deliver.’
It is understood Ms Reeves will seek to prioritise reducing inflation, keeping public spending under control by meeting her fiscal rules and kick-starting economic growth.
She is expected to make a series of public announcements on productivity before the Budget.
The scale of the challenge facing the Chancellor was illustrated by the NIESR economic think tank saying last month that Ms Reeves is on track for a £41billion shortfall on her self-imposed rule of balancing day-to-day spending with tax receipts in 2029-30.
Ruth Curtice, Chief Executive of the Resolution Foundation, said: ‘The Chancellor has officially fired the starting pistol on the countdown to one of the toughest second Budgets in living memory.
‘With higher gilt yields currently adding over £3billion to debt interest costs, and over £6billion of policy U-turns announced since March, the Chancellor is already on track to miss her fiscal rules.
‘With a growth downgrade also likely, significant fiscal tightening will be needed.
‘The Chancellor should use this Budget to set out her tax strategy as well as raise revenue.
‘While tax rises are likely to be necessary, this should aim to ensure they make the system fairer and more efficient, supporting higher growth and lower inequality.’
Rebecca Williams, Divisional Lead of Financial Planning at Rathbones, said: ‘With the Budget now set for November 26, it feels like a rather late fiscal event.
‘But with public finances stretched thin, the delay underlines that ministers are in full-on thinking mode ahead of what is shaping up to be one of the most consequential Budgets in a generation.
‘It seems inevitable that some form of tax rises – stealth or otherwise – will be unveiled as the government looks to balance the books.’
Lord Clarke told the Financial Times that Britain is ‘much nearer to the risk of a financial crisis than the government is remotely acknowledging’.
Jim Reid of Deutsche Bank said: ‘We’re seeing a slow-moving vicious cycle: rising debt concerns push yields higher, worsening debt dynamics, which in turn push yields higher again.’
However, Treasury minister Lord Spencer Livermore has insisted the bond movements are ‘orderly’. Much of the state borrowing is through 10-year gilts, which have seen smaller shifts.
Downing Street stressed yesterday that the government’s commitment to its fiscal rules remained ‘iron clad’.
‘You’ll have seen since this Government took office that we have taken the necessary decisions to stabilise the public finances, drive growth,’ the PM’s spokesman said.
‘Our fiscal strategy has been backed by the IMF and others, and our approach has helped interest rates to be cut five times since the election, which is the best way to bring borrowing costs and inflation down.’
Asked whether the shake-up of Sir Keir’s team was a blow to the Chancellor’s authority, the official said: ‘No, and as I say it reflects the strengthening of the relationship between the Prime Minister and the Chancellor, a determination to drive growth in the economy, a recommitment to our robust fiscal rules.’
Inflation has been running at an 18-month high and is expected to climb towards 4 per cent.
There are warnings that gilts yields could surge to more than 6 per cent by the end of the year.
Ms Reeves is expected to confirm this morning that the Budget will be held on November 26. But that is two weeks beyond the 10-week notice period the Office for Budget Responsibility watchdog normally requires.
Shadow business secretary Andrew Griffith said: ‘Almost three whole months of speculation as to how Labour will fix their own mess is not good for anyone.
‘A Budget date as late as 26 November just inflicts damaging uncertainty on business.’
Mark Dowding, fixed income chief investment officer at RBC BlueBay Asset Management, said: ‘Investors have concluded that relying on tax hikes alone to close a fiscal shortfall, is destined to end in failure.’
