Plenty of concern about UK gilt yields and economic health but this isn’t a Liz Truss moment

Published

2 months ago

January 8, 2025

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How worried should Rachel Reeves be about the fact that the interest rates on government bonds have leapt to the highest level in more than a quarter of a century?

More to the point, how worried should the rest of us be about it?

After all, the interest rate on 30-year government bonds (gilts, as they are known) hit 5.37% today—the highest level since 1998. The interest rate on the benchmark 10-year government bond is also up to the highest level since 2008.

Higher government borrowing rates mean, rather obviously, that the cost of all that investment Keir Starmer has promised in the coming years will go up. And since these rates reflect longer-term expectations for borrowing costs, in practice it means everything else in this economy will gradually get more expensive.

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There are short-term and long-term consequences to all of this. In the short run, it means it will be harder for Ms Reeves to meet those fiscal rules she set herself. Back at the budget, she left herself a (in fiscal terms) paper-thin margin of £9.9bn not to overshoot on borrowing vs her new rules.

According to Capital Economics, based on recent market moves, that margin might now have been eroded down to around £1bn.

And, given that’s before the Office for Budget Responsibility (OBR) has even decided on changes to its forecasts, it’s now touch and go as to whether Ms Reeves will meet her fiscal rules. As my colleague Sam Coates reported this week, the upshot is the Treasury is poised to pare back its spending plans in the coming years – a depressing prospect given the chancellor only just set them. But that won’t be clear until the OBR’s updated forecasts are published in March.

However, fiscal rules and political embarrassments are one thing – the bigger picture is another. And that bigger picture is that the UK is being charged higher interest rates by international investors to compensate them for their concerns about our economic future – about rising debt levels, about the threat of higher inflation and about fears of sub-par growth in the years to come.

How does this compare to the Liz Truss mini-budget?

But perhaps the biggest question of all is whether, what with long-term bond yields higher now (over 5.2%) than the highs they hit in October 2022, after the infamous mini-budget (4.8%), does that mean the economy is in even more of a crisis than it was under Liz Truss?

The short answer is no. This is nothing like the post mini-budget aftermath. Investors are concerned about UK debt levels – yes. They are repricing our debt accordingly. There was even a moment for a few days after the budget last autumn when the yields on UK bonds were behaving in an erratic, worrying way, rising more than most of our counterparts.

But – and this is the critical bit – we saw nothing like the levels of panic and concern in markets that we saw after the mini-budget. But don’t just take it from me. Consider two data-based metrics that are pretty useful in this case.

The first is to consider the fact that back in October 2022 it wasn’t just that the interest rates on government bonds were rising. It was that the pound was plummeting at the same time. That’s a toxic cocktail – a signal that investors are simply pulling their money out of the country. This time around, the pound is pretty steady, and is far stronger than it was in late 2022, when it hit the lowest level (against a basket of currencies) in modern history.

Is this just a UK problem?

The second test is to ask a question: is the UK an outlier? Are investors looking at this country and treating it differently to other countries?

And here, the answer is again somewhat reassuring for Ms Reeves. While it’s certainly true that UK government bond yields are up sharply in recent weeks, precisely the same thing is true of US government bond yields. Even German yields are up in recent weeks – albeit not as high as the US or UK.

In other words, the movements in bond yields don’t appear to be UK-specific. They’re part of a bigger movement across assets worldwide as investors face up to the new future – with governments (including the UK and the US under Donald Trump) willing to borrow more and spend more in the future. As I say, that’s somewhat reassuring for Ms Reeves, but I’m not sure it’s entirely reassuring for the rest of us.

One way of looking at this is by measuring how much the UK’s bond yields deviated from those American and German cousin rates in recent months. And while there was a point, a few days after Ms Reeves’ Halloween budget, when UK bond yields were more of an outlier than they historically have been after fiscal events, in the following weeks the UK stopped being much of an outlier. Yes, it was being charged more by investors, but then given the budget involved large spending and borrowing increases, that’s hardly surprising.

Now compare that with what happened after the mini-budget, when the UK’s bond yields deviated from their counterparts in the US and Germany more than after any other fiscal event in modern history – a terrifying rise which only ended after Kwasi Kwarteng stood down. Only when Ms Truss resigned were they back in what you might consider “normal” territory.

Now, it’s hard to compare different historical moments. The mini-budget was happening at a tense moment in financial markets, with the Bank of England poised to reverse its quantitative easing. Not all of the roller coaster can be attributed to Ms Truss. Even so, comparing that period to today is night and day.

Investors are not exactly delighted with the UK’s economic prospects right now. They’re letting this be known via financial markets. But they’re certainly not horrified in the way they were after the mini-budget of 2022.

Business

The town bracing for UK’s biggest council tax rise of almost 16%

Published

9 hours ago

March 14, 2025

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The town bracing for UK's biggest council tax rise of almost 16%

The last thing I was expecting to discover on the doorstep of a Falkirk house was a 70-year-old woman crying at the near 16% council tax rise she and tens of thousands of others face next month.

Falkirk is bracing for the UK’s biggest hike in bills as the local authority faces a crisis of costs.

One councillor responsible for the increases has called in the police after receiving beheading taunts and threats of violence.

The area is facing its most difficult period in its 30-year history, while residents feel fragile and fobbed off.

Councils oversee the running of schools and social care, maintaining roads and collecting bins. They take charge of housing, swimming pools and libraries. The list is endless.

But Britain’s local authorities are cash-strapped and there are questions about how they should be funded in the long term.

Sky News went inside one Falkirk street to get a snapshot of the mood – and it was bleak.

We went door to door on Wilson Road and first stumbled across 70-year-old Catherine Mochar.

The unpaid carer was seemingly unaware of the upcoming changes to her bill and became visibly upset at the prospect of scraping together more cash in her already extremely stretched household budget.

“It’s absolutely ridiculous,” she said as her voice cracked.

Ms Mochar looks after her elderly sister and says her care package was revoked as the pensioner was deemed suitable to deal with the situation herself.

She says she is not entitled to a council tax exemption and worries about finding an extra 15.6%.

She said: “I am a pensioner. I don’t know where I am going to get it [the money] from. It is quite scary the thought of it.”

Round the corner from Catherine’s house, we meet a family who feel like they are paying more and getting less.

Claire Hamilton and William Reid have a three-year-old son and regularly use the local foodbank to make ends meet.

“It is going to become a choice between heating the house or paying council tax. Or getting food in and paying the council tax,” Claire says.

“It is quite a jump for not a lot in return. The collections on the bins keep getting longer and longer.”

She continues: “You want to do the best by your child and obviously they are not aware of all these stresses going on in the background.”

Council tax differs across UK

A drop in the frequency of bin collections is a moan people across the UK share and feeds into the narrative surrounding local services.

Council tax rates have been frozen or capped for much of the last two decades in Scotland, but this year the Scottish government has granted local leaders the power to go their own way.

In England, a principle exists which usually prevents more than a 5% increase to council tax without a referendum, mostly to protect taxpayers from excessive increases.

It is thought the average increase in England will not surpass last year’s total of 5.1%. There are some exemptions including Bradford which is hiking costs by 10%.

But Falkirk surpasses everyone and is the UK’s most extreme case.

Independent councillor Laura Murtagh initiated the idea of the 15.6% increase which was eventually voted through by most of her colleagues.

Councillor behind 15.6% rise calls in police

She stresses anything less than the increase she proposed would have resulted in services, including education provision, being slashed.

But it has come at a personal cost.

Ms Murtagh, who stresses she does not want to incite a further pile-on, tells Sky News she has contacted police after threats of violence and taunts online depicting beheadings.

She said: “It has made me not want to go out. It has made me not want to go to events.

“I am having a conversation with the police. They are nasty threats. There are people who have said you could do with a kicking or you could do with more than that.

“People are sharing memes where they are doing beheading memes or whatever.”

Local leaders say their rates have been much lower than their neighbours for many years which is unsustainable as demand for services soars.

The leader of Falkirk Council, Cecil Meiklejohn, was asked by Sky News if she could justify the 15.6% rise.

She said: “It is quite a hike. We always knew council tax needed to go up.

“We know that we have to continue to deliver good quality services, and we can’t do that without increasing our revenue and the only way we have the opportunity to do that locally is by increasing council tax.”

She concluded: “We will work with people who are going to be impacted by the increase.”

Business

Economy finds reverse gear in January with surprise contraction

Published

11 hours ago

March 14, 2025

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Economy finds reverse gear in January with surprise contraction

The UK economy shrank at the start of 2025, according to official figures which had been expected to show further meagre growth.

The Office for National Statistics (ONS) said that output declined by 0.1% during the month following the 0.4% growth seen in December.

A growth figure of 0.1% had been tipped by a majority of economists but the ONS noted a slump in manufacturing output.

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Its director of economic statistics, Liz McKeown, said: “The economy shrank a little in January but grew in the latest three months as a whole, with the overall picture continuing to be of weak growth.

“The fall in January was driven by a notable slowdown in manufacturing, with oil and gas extraction and construction also having weak months.

“However, services continued to grow in January led by a strong month for retail, especially food stores, as people ate and drank at home more.”

January’s data marks a fresh blow for the chancellor as the economy faces headwinds on many fronts at a time when her stated priority is securing economic growth.

Looming large for Rachel Reeves is the threat of an adverse business reaction to budget tax hikes she is due to impose from April.

Firms are facing the bulk of the £40bn bill through employer national insurance contributions and are warning of job losses, weaker pay rises and investment, along with possible price hikes, to account for the surge in costs.

Consumer spending power is also set to be tested at the same time as essential bills including those for council tax, water and household energy are due to rise sharply.

Other challenges include the escalating trade war initiated by Donald Trump, which is tipped by economists to dent growth prospects globally.

Ms Reeves is low on ammunition as she prepares a spring statement for MPs later this month, with the welfare bill set to be slashed to avoid breaking her own spending rules.

At the same time, the independent Office for Budget Responsibility is widely expected to downgrade its forecasts for UK growth ahead.

The chancellor said of the ONS data: “The world has changed and across the globe we are feeling the consequences.

“That’s why we are going further and faster to protect our country, reform our public services and kickstart economic growth to deliver on our Plan for Change.

“And why we are launching the biggest sustained increase in defence spending since the Cold War, fundamentally reshaping the British state to deliver for working people and their families; and taking on the blockers to get Britain building again.”

Her Conservative counterpart, Mel Stride, urged her to use the spring statement to change course.

“It is no surprise that growth is down again, following near no growth in the last three months of 2024”, he said.

“After consistently talking Britain down, raising taxes to record highs and crushing business with their extreme employment legislation this government is a growth killer.

“Labour inherited the fastest growing economy in the G7 but since they arrived business confidence has collapsed and jobs are being lost.”

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Trump threatens EU with 200% tariffs on alcohol – including wine and champagne

Published

1 day ago

March 13, 2025

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Trump threatens EU with 200% tariffs on alcohol - including wine and champagne

Donald Trump has warned the European Union he will impose a 200% tariff on its alcohol – including wine and champagne – if the bloc imposes duties on US whiskey.

The US president used a social media post to issue his latest threat to the EU, having previously warned that it was created to “screw the United States” and would “very soon” face his escalating trade war.

He wrote in a Truth Social post: “The European Union, one of the most hostile and abusive taxing and tariffing authorities in the world, which was formed for the sole purpose of taking advantage of the United States, has just put a nasty 50% tariff on whisky.

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“If this tariff is not removed immediately, the US will shortly place a 200% Tariff on all WINES, CHAMPAGNES, & ALCOHOLIC PRODUCTS COMING OUT OF FRANCE AND OTHER E.U. REPRESENTED COUNTRIES.

“This will be great for the wine and champagne businesses in the US,” he concluded.

It was Mr Trump‘s response to a European Commission pledge to reimpose previously suspended tariffs on the US in response to US steel and aluminium duties which came into force on Wednesday.

The commission said its retaliatory measures would target US goods worth €26bn from 1 April unless talks could resolve the trade war escalation.

Mr Trump is widely expected, from 2 April, to carry out a previous threat that would see all EU exports to the United States come under tariffs – mirroring current plans to target his closest neighbours Mexico and Canada.

Financial markets were quick to react to the latest escalation, with EU stock markets sinking across the board.

The declines were led by drinks manufacturers. Pernod Ricard on the CAC in Paris, for example, was more than 3.5% lower in the moments after Mr Trump’s post was published.

The FTSE 100 was also in negative territory. Diageo, which counts Irish-made favourite Guinness among its stable of brands, was only 0.1% down.

While the UK has not been threatened directly with tariffs beyond the universal steel and aluminium duties, many of its constituent companies would be hurt by an expanding EU-US trade spat.

United Nations data shows that EU nations export alcoholic drinks worth more than $11bn per year to the United States, with wine accounting for half that sum.

It was understood that before the threat was made, Spain, France and Italy had been among nations urging the EU not to target wine and spirits as part of its response to the metals duties.

The Irish Whiskey Association said of the growing protectionism: “There is no winner in a trade war. The imposition of tariffs will impact on our businesses and our consumers.

“Having our sector implicated in this dispute puts jobs, investments and businesses at risk and has the potential to be devastating for Irish Whiskey.”