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The lack of confidence in the British economy has become contagious. From companies it has now spread to financial markets. Investors dumped bonds and sold the pound last week as concerns grew over the UK’s fiscal sustainability. Ten-year government bond yields are near their highest level in 16 years. If they do not go down again, Chancellor Rachel Reeves’ “ironclad” fiscal rule (balancing the current budget in five years) will be broken. To regain credibility, the Labor government must quickly detail credible plans to boost economic growth and rein in spending.
The recent sell-off in government bonds has been triggered by events in the United States. Higher inflation expectations in the world’s largest economy, linked to President-elect Donald Trump’s tariff agenda and strong economic data, have pushed up Treasury yields, the benchmark for global borrowing. This has fueled concerns about debt sustainability in other economies. But negative rumors about Britain’s “stagflationary” growth prospects, in the wake of an autumn budget that raised taxes last October and the limited margin Reeves left against his fiscal rules, have made the UK a target. main for bond watchers.
What can the government do? Unless yields begin to escalate out of control, knee-jerk announcements to cut costs or increase revenue at this time could sound like desperation and perhaps even drive yields higher. Bond yields come and go, and the current sell-off has not been disorderly. Comparisons to the market panic sparked by former Prime Minister Liz Truss’ “mini” budget in September 2022 are misguided.
But doing nothing is not an option either. Trump’s capriciousness means global bond markets will remain tense. And the message from investors is that their faith in Britain’s ability to cut costs and increase growth in this volatile environment is quite low. The Labor Party must then develop its economic strategyrather than talking vaguely about future efficiency savings and being pro-growth. Businesses and investors want to know how Britain’s prospects will tangibly improve in the short term.
This means that the government must double efforts eliminate barriers to hiring, investment and business expansion. Plans announced on monday Creating AI “growth zones” is a start. But companies also want to know how reforms to the planning system will actually speed up construction processes across the country.
The industrial strategy, scheduled for spring, is also an opportunity to galvanize confidence by outlining a portfolio of key infrastructure projects and ambitious plans to improve access to highly skilled talent. Reeves could outline tax reduction and simplification intentions ahead of the Autumn Budget, which will be this year’s main fiscal event. That could help whet business appetite.
However, bond traders will also look for evidence of near-term improvements in Britain’s fiscal position. The chancellor is right to rule out further tax rises, which would be disastrous for confidence. But that means Labor must be prepared to save in high-cost but politically sensitive areas such as welfare benefits, the civil service and the triple lock on pension payments. In fact, if the fiscal arithmetic does not improve markedly, the government could make cuts to include in the Office for Budget Responsibility’s next forecast on March 26.
Rising bond yields are a wake-up call. Labor must remain calm and avoid hasty announcements, but it cannot continue in the slow and confusing manner as it began. It is time for the government to promptly explain and detail its strategy to generate growth and reduce costs.