Rachel Reeves is weighing significant reductions to public services as the UK’s borrowing costs surge to levels not seen since 1998, amid mounting pressure on the Labour government’s fiscal strategy.
The Chancellor’s position has become increasingly precarious following a tumultuous week in which investors drove UK borrowing costs higher and pushed sterling to a 14-month low against the dollar. Government officials have disclosed that Reeves is prepared to implement deeper departmental spending cuts than initially planned, having ruled out both tax increases and additional borrowing.
The Treasury’s chief secretary, Darren Jones, attempted to calm market anxieties by asserting that gilt markets remained “orderly” whilst emphasising the government’s commitment to its fiscal framework. The dramatic sell-off in global government debt markets has particularly affected UK gilts, with yields on 10-year bonds briefly touching 4.9% before settling at 4.8%.
Market specialists have distinguished current conditions from the chaos that ensued during Liz Truss’s brief tenure, with Mohamed El-Erian, former IMF deputy director, noting the more orderly nature of present yield increases. The global context includes concerns about potential inflationary pressures under a possible Trump presidency in the United States.
The situation threatens to eliminate the £10 billion buffer Reeves had maintained in her autumn budget to meet her primary fiscal rule. Labour backbenchers have expressed growing alarm at the prospect of additional cuts, with one MP indicating that confidence in the Chancellor is rapidly diminishing.
The Treasury’s stance appears resolute, with sources indicating a clear preference for spending reductions over tax increases. While Reeves has protected most departmental budgets for the next two years, unprotected departments now face the prospect of cuts exceeding 1% annually thereafter, with potential emergency measures possibly being announced before the scheduled spring statement.
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