Unlock Editor's Digest for free
FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
Distrust in the British economy has become contagious. It is now spreading from businesses to financial markets. Investors dumped gold and sold the pound last week amid growing concerns about Britain's fiscal sustainability. The 10-year Treasury yield is near its highest level in 16 years. If policy is not reversed, Chancellor Rachel Reeves's “ironclad” fiscal rule of balancing the current budget over five years will be broken. To restore confidence, the Labor government urgently needs to detail a credible plan to boost economic growth and rein in spending.
The recent decline in gold prices was caused by developments in the United States. Rising inflation expectations in the world's largest economy, linked to President-elect Donald Trump's tariff policies and strong economic data, are pushing up U.S. Treasury yields, a gauge of global borrowing. This has raised concerns about debt sustainability in other countries as well. However, in the wake of the tax hike in the autumn budget last October and the limited surplus left by Prime Minister Reeves in violation of fiscal rules, negative voices about the UK's “stagflationary'' growth prospects spread, and the UK It has become a prime target for bond vigilantes.
What can the government do? Unless yields start rising out of control, rushing to announce cost cuts or revenue increases now could look desperate and push yields higher. Bond yields ebb and flow, and the current decline is not chaotic. Comparisons with the market panic caused by former Chancellor Liz Truss's 'mini' Budget in September 2022 are beside the point.
But doing nothing is also not an option. President Trump's fickleness means global bond markets will continue to be disrupted. And the message from investors is that confidence in the UK's ability to cut costs and increase growth in this volatile environment is quite low. In that case, Labor needs to flesh out its economic strategy, rather than talking vaguely about future efficiency gains and boosting growth. Businesses and investors want to see how the UK's outlook improves measurably in the short term.
This means governments need to redouble their efforts to remove barriers to jobs, investment and business expansion. Plans announced Monday to create AI “growth zones” are the beginning. But businesses also want to know how the touted planning system reforms will actually speed up the construction process across the country.
The Industrial Strategy, due out in the spring, is also an opportunity to boost confidence by outlining a pipeline of major infrastructure projects and ambitious plans to improve access to highly skilled talent. Mr. Reeves is likely to lay out his intentions to cut and simplify taxes ahead of his fall budget proposal, the main event of this fiscal year. It may help stimulate business motivation.
But bond traders will also be looking for evidence that Britain's financial situation will improve in the near term. The Chancellor is right to rule out further tax increases, but that would have a devastating impact on confidence. But that means Labor will have to be prepared to save in expensive but politically sensitive areas such as welfare, the civil service and the triple lock on pension payments. Indeed, if the fiscal calculations do not improve markedly, the government may make cuts to be reflected in the Office for Budget Responsibility's next forecasts on March 26.
Rising bond yields are a wake-up call. Labor should remain calm and avoid hasty announcements, but it cannot continue in the slow and vague manner in which it started. It is time for the government to clearly and thoroughly outline its strategy to deliver growth and reduce costs.
