Plenty of concern about UK gilt yields and economic health but this isn’t a Liz Truss moment
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.
Money blog: Billionaire Premier League owner ‘thinking of leaving UK’ after budget
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
MPs to debate emergency law to keep British Steel open as prime minister warns national security ‘on the line’
MPs will today debate emergency laws to save British Steel after the prime minister warned the country’s “economic and national security is on the line”.
Sir Keir Starmer said the future of the company’s Scunthorpe plant – which employs about 3,500 people – “hangs in the balance” after its owner said the cost of running it was unsustainable.
The prime minister said legislation would be passed in one day to allow the government to “take control of the plant and preserve all viable options”.
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MPs and Lords are being summoned from their Easter recess to debate the move and will sit from 11am.
The last time parliament was recalled was on 18 August 2021 to debate the situation in Afghanistan.
The government has been considering nationalising British Steel after Jingye, the Chinese owner, cancelled future orders for iron ore, coal and other raw materials needed to keep the blast furnaces running.
The furnaces are the last in the UK capable of making virgin steel.
Jingye last month rejected a £500m state rescue package – raising fresh doubts about the Lincolnshire plant and fears it could close in the coming days.
The steel from the plant is used in the rail network and the construction and automotive industries. Without it, Britain would be reliant on imports at a time of trade wars and geopolitical instability.
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Inside the UK’s last blast furnaces
In a statement on Friday, Sir Keir said: “I will always act in the national interest to protect British jobs and British workers.
“This afternoon, the future of British Steel hangs in the balance. Jobs, investment, growth, our economic and national security are all on the line.”
The prime minister said steel was “part of our national story, part of the pride and heritage of this nation” and “essential for our future”.
He said the emergency law would give the business secretary powers to do “everything possible to stop the closure of these blast furnaces”.
This includes the power to direct the company’s board and workforce. It will also ensure it can order the raw materials to keep the furnaces running and ensure staff are paid.
The Scunthorpe plant is the last in the UK that can make virgin steel. Pic: Reuters
One of the two blast furnaces at Scunthorpe
Chancellor Rachel Reeves said the government was “taking action to save British steel production and protect British jobs”, while Business Secretary Jonathan Reynolds said the owner had left the government with “no choice”.
Mr Reynolds said Jingye had confirmed plans to close the Scunthorpe furnaces immediately despite months of talks and the offer of £500m of co-investment.
The company said it had invested £1.2bn since taking over in 2020, but that the plant is losing £700,000 a day.
Read more:
Govt intervention in British Steel ‘a remarkable step’ – analysis
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What will happen with British Steel?
Conservative leader Kemi Badenoch said the government had landed itself in a “steel crisis entirely of their own making”.
She said when she was business secretary, she had negotiated a plan with British Steel “to limit job losses and keep the plant running”.
Ms Badenoch said the government had “bungled the negotiations, insisting on a Scunthorpe-only deal that the company has deemed unviable”.
She added: “Keir Starmer should have seen this coming. But instead of addressing it earlier in the week when parliament was sitting, their incompetence has led to a last-minute recall of parliament.”
The Unite union said the prime minister’s recalling of parliament was “absolutely the right thing to do to begin the process of nationalisation”.
While the government hasn’t confirmed those plans, the chancellor also said earlier this week that “all options” are on the table.
Sky News understands accountancy firm EY is being lined up to play a role in a nationalisation process.
The government’s intervention over British Steel comes six months after the last blast furnace was closed at Port Talbot in Wales.
Plaid Cymru has questioned why the government didn’t take similar action there.
The party’s Westminster leader, Liz Saville Roberts, said: “Parliament is being recalled to debate the nationalisation of Scunthorpe steelworks.
“But when global market forces devastated Welsh livelihoods in Port Talbot, Labour dismissed Plaid Cymru’s calls for nationalisation as ‘pipe dreams’.”
Business
MPs to debate emergency legislation to keep British Steel open as ‘security is on the line’
Sir Keir Starmer has said the government will debate emergency legislation on Saturday to keep the British Steel plant in Scunthorpe open as “our economic and national security is on the line”.
The prime minister added that “the future of British Steel hangs in the balance” and legislation will be passed tomorrow to allow the government to “take control of the plant and preserve all viable options” for it.
MPs and Lords are being summoned back from Easter recess to Westminster to debate draft legislation on the plans, and will sit from 11am on Saturday.
The government had been actively considering nationalising British Steel after Jingye, its Chinese owner in Scunthorpe, cancelled future orders for the iron ore, coal and other raw materials needed to keep the last blast furnaces in the UK running.
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Jingye also rejected a £500m state rescue package in a move which raised fresh doubts about the 3,500 jobs at the Lincolnshire plant – with it feared the site would be forced to close as early as next week.
The steel from the plant is used in the rail network and the construction and automotive industries. Without the plant, Britain would be reliant on imports at a time of trade wars and geopolitical instability.
In a short statement delivered from Downing Street this evening, Sir Keir said: “I will always act in the national interest to protect British jobs and British workers.
“This afternoon, the future of British Steel hangs in the balance.
“Jobs, investment, growth, our economic and national security are all on the line.”
One of the two blast furnaces at British Steel’s Scunthorpe operation
‘A new era of global instability’
The prime minister added he has been to the site in Scunthorpe and met the steelworkers there.
He said he understands how “important steel is” to the “whole country” and continued: “It’s part of our national story, Part of the pride and heritage of this nation.
“And I’ll tell you this, it is essential for our future.
“[The government’s] plan for change means we need more steel, not less. So we will act with urgency… This situation and our response is unique.
“While it is true that we’re facing a new era of global instability, our concerns about this plant and negotiations to protect it have been running for years.”
Sir Keir said parliament will be recalled for a “Saturday sitting” and will “pass emergency legislation” in “one day” to give the business secretary the powers to do “everything possible to stop the closure of these blast furnaces”.
He added: “We will keep all options on the table. Our future is in our hands.”
Chancellor Rachel Reeves posted on X after the statement that the government is “taking action to save British steel production and protect British jobs”.
“We are securing Britain’s future,” she added.
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Inside the UK’s last blast furnaces
Tory leader criticises Starmer
Business Secretary Jonathan Reynolds said this evening the Chinese owner of British steel has left the government with “no choice” but to act.
Jingye had confirmed plans to close the blast furnaces at Scunthorpe immediately despite months of talks and the offer of £500m of co-investment from the UK government, Mr Reynolds added in a statement.
It came as Conservative leader Kemi Badenoch said the government has landed itself in a “steel crisis entirely of their own making”.
“As business secretary, I negotiated a modernisation plan with British Steel to limit job losses and keep the plant running, including introducing an electric arc furnace in Teesside, similar to what we did with Tata at Port Talbot steelworks.
“However, the union-led Labour government have bungled the negotiations, insisting on a Scunthorpe-only deal that the company has deemed unviable. Keir Starmer should have seen this coming. But instead of addressing it earlier in the week when parliament was sitting, their incompetence has led to a last-minute recall of parliament.”
She added the government’s attempts to find a solution to the crisis are inevitably “going to cost taxpayers a lot of money”.
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Badenoch denies supporting local coalitions
British Steel’s Scunthorpe plant.
Pic Reuters
Meanwhile, the Unite union welcomed Sir Keir’s announcement by saying it is “absolutely the right thing to do to begin the process of nationalisation”.
The government has not confirmed plans to nationalise the company, but like the prime minister this evening, Chancellor Rachel Reeves said earlier this week that “all options” are on the table.
Unite general secretary Sharon Graham said this evening: “I am pleased that the government has listened to representations by Unite and other steel unions over the future of British Steel.
“Ministers could not have allowed a foundation industry to go under with the loss of more than 3,000 jobs and key skills… Discussions have been positive and whilst a longer-term plan needs to be developed, this gives workers the reprieve we have been asking for.”
‘When it was Wales, they mocked’
The government’s intervention over British Steel comes six months after the last blast furnace was closed at Port Talbot in Wales.
Welsh political party Plaid Cymru has questioned why the government did not take similar action to save that steelworks.
The party’s Westminster leader Liz Saville Roberts MP said: “Parliament is being recalled [on Saturday] to debate the nationalisation of Scunthorpe steelworks.
“But when global market forces devastated Welsh livelihoods in Port Talbot, Labour dismissed Plaid Cymru’s calls for nationalisation as ‘pipe dreams’.
“In a real emergency, governments step up to defend their strategic interests. Plaid Cymru recognised the importance of Welsh steelmaking. Labour chose to look the other way.
“When it was Wales, they mocked. Now it’s England, they act.
“Labour has taken Wales for granted for far too long – and the people of Wales won’t forget it.”
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