The chancellor may need to consider “very severe” spending cuts if the recent rise in UK borrowing costs erodes her fiscal headroom, a former Bank of England economist has said.
Sir John Gieve, a former Bank deputy governor, said that recent bond market movement has not come in response to UK policy changes and explained that yields have been following the US market.
Speaking to BBC Radio 4’s Today programme, Gieve said: “This is very different from the Truss debacle, in that it’s not a response to anything we’ve done in the UK.”
In recent days, Reeves’ £10 billion of fiscal “headroom”, allowed for in the autumn budget, has been squeezed by a surge in government borrowing costs.
Gieve’s comments came after chief secretary to the Treasury Darren Jones moved to reassure markets in a statement to the House of Commons on Thursday.
Responding to an urgent question on recent market movements. Jones insisted repeatedly that the UK was fully committed to its fiscal rules. He told MPs: “There should be no doubt about the government’s commitment to economic stability and sound public finances, this is why meeting the fiscal rules is non-negotiable.”
Speaking on Friday morning, Gieve insisted that the evolving situation will require a lot of “new, difficult decisions”.
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Gieve said: “The choice [the chancellor] is going to face in the spending review and then the budget in the autumn, is ‘can I raise borrowing?’ — and the increase in interest rates that’s happened now will decrease her scope for doing that within her rules. ‘Or do I increase taxes again?’
“‘Or do I actually institute some very severe reductions and squeezes on public services?’”
Despite recent market turmoil, culture secretary Lisa Nandy has said that the government is still “on track” with its ambition for the UK to be “the fastest growing economy in Europe.”
She told the BBC Radio 4 Today programme that the Labour government will not go back to the “bad old days” of Conservative budgets.
She said: “We inherited an economy where it was hard to see who had confidence, both to invest, and particularly for consumers to be able to feel that they could spend, given the huge fluctuations that we’d seen, particularly after the Liz Truss/Kwasi Kwarteng mini-budget.”
“The chancellor has been absolutely clear that we are not going back to those bad old days. We have had two interest rate cuts since she became chancellor, and we have worked very hard to restore economic credibility.”
Meanwhile, shadow business minister and former Treasury select committee chair Dame Harriett Baldwin argued the chancellor made things “substantially worse” with her budget decision to push ahead with an extra £350 billion of public spending over the next five years.
Dame Harriet told Sky News: “In the first half of last year the UK economy was actually growing the fastest in the G7, so it was showing some very promising signs in the first half of last year.
“Unfortunately what happened after the election was that by talking very negatively about the UK economy and then by implementing this massive budget, which has huge implications in terms of taxes on businesses which create the growth in the country, the chancellor seems to have stalled that economic recovery.
“The reality is that the choices that the chancellor took in her budget have made things substantially worse than the global picture for the UK.
“That’s why we were keen for her to come yesterday to justify her budget and also to talk about how she’s going to generate the growth in the UK economy that we all want to see.”
Josh Self is Editor of Politics.co.uk, follow him on Bluesky here.
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