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
Concessions to welfare reforms to be revealed after Labour backbench rebellion forces government retreat
Changes to welfare reforms, forced on the government by rebel Labour MPs, are being revealed today ahead of a crucial vote.
The original bill restricted eligibility for the personal independence payment (PIP) and cut the health-related element of universal credit (UC).
The government, which insisted welfare costs were becoming unsustainable, was forced into a U-turn after 126 Labour backbenchers signed an amendment that would have halted the bill at its first Commons hurdle.
Explainer: What are the welfare concessions?
While the amendment is expected to be withdrawn, after changes that appeased some Labour MPs, others are still unhappy and considering backing a similar amendment to be tabled today.
Please use Chrome browser for a more accessible video player
Starmer defends welfare U-turn
Here are the main changes to the UC and PIP bill:
• current PIP claimants will keep their benefits; stricter eligibility requirements will only apply to new claims from November 2026
• a review of the PIP assessment, which will have input from disabled people
• existing recipients of the health-related element of UC will have their incomes protected in real terms
Work and Pensions Secretary Liz Kendall said in a statement that the legislation now aims to deliver a “fairer, more compassionate system” ahead of the second reading and vote on Tuesday.
“We must build a welfare system that provides security for those who cannot work and the right support for those who can. Too often, disabled people feel trapped, worried that if they try to work, they could lose the support they depend on.
“That is why we are taking action to remove those barriers, support disabled people to live with dignity and independence, and open routes into employment for those who want to pursue it.
“This is about delivering a fairer, more compassionate system as part of our Plan for Change which supports people to thrive, whatever their circumstances.”
Work and Pensions Secretary Liz Kendall insists welfare reforms will create ‘a fairer, more compassionate system’. Pic: PA
On Saturday, Sir Keir Starmer said fixing the UK’s welfare system was a “moral imperative”. The government claimed cuts to sickness and disability benefits would shave £5bn off the welfare bill and get more people into work.
The Resolution Foundation believes the concessions could cost as much as £3bn, while the Institute for Fiscal Studies warned that the changes make tax rises more likely.
Read more:
Starmer’s most damaging U-turn yet
Liz Kendall defends welfare retreat
👉 Click here to listen to Electoral Dysfunction on your podcast app 👈
Health Secretary Wes Streeting told Sky News that welfare bill changes have put Labour in a much better position ahead of tomorrow’s vote.
On Sunday Morning with Trevor Phillips, Mr Streeting said: “There were things that we didn’t get right, we’ve put right, and there’ll be a debate about future amendments and things, I’m sure, as it goes through in the usual way.”
Talking to Sky News about the welfare reforms, Health Secretary Wes Streeting said there were things Labour ‘didn’t get right’
On the same programme, shadow work and pensions secretary Helen Whately repeatedly refused to say whether the Conservatives would back the bill, but would review the proposals after the minister’s statement later.
“We have said that if there are more savings that actually bring the welfare bill down, if they’ll get more people into work, and if they commit to using the savings to avoid tax cuts in the autumn, which looks highly unlikely at the moment, then they have our support.”
The Liberal Democrats plan to vote against the bill and have called for the government to speed up access-to-work decisions to help people enter the workforce.
Donald Trump has said the US government has found a buyer for TikTok that he will reveal “in about two weeks”.
The president told Fox News “it’s a group of very wealthy people”, adding: “I think I’ll probably need China approval, I think President Xi will probably do it.”
TikTok was ordered last year to find a new owner for its US operation – or face a ban – after politicians said they feared sensitive data about Americans could be passed to the Chinese government.
The video app’s owner, Bytedance, has repeatedly denied such claims.
It originally had a deadline of 19 January to find a buyer – and many users were shocked when it “went dark” for a number of hours when that date came round, before later being restored.
However, President Trump has now extended the deadline several times.
The last extension was on 19 June, when he signed an executive order pushing it back to 17 September.
Mr Trump’s latest comments suggest multiple people coming together to take control of the app in the US.
Among those rumoured to be potential buyers include YouTube superstar Mr Beast, US search engine startup Perplexity AI, and Kevin O’Leary – an investor from Shark Tank (the US version of Dragons’ Den).
Bytedance said in April that it was still talking to the US government, but there were “differences on many key issues”.
It’s believed the Chinese government will have to approve any agreement.
The president said the identity of the buyer would be disclosed in about two weeks. Pic: Fox News
President Trump’s interview with Fox News also touched on the upcoming end of the pause in US tariffs on imported goods.
On April 9, he granted a 90-day reprieve for countries threatened with a tariff of more than 10% to give them time to negotiate.
Deals have already been struck with some countries, including the UK.
Read more from Sky News:
Iran could begin enriching uranium again in months – UN
Major porn sites to introduce ‘robust’ age verification in UK
The president said he didn’t think he would need to push back the 9 July deadline and that letters would be sent out imminently stating what tariff each country would face.
“We’ll look at the deficit we have – or whatever it is with the country; we’ll look at how the country treats us – are they good, are they not so good. Some countries, we don’t care – we’ll just send a high number out,” he said.
“But we’re going to be sending letters out starting pretty soon. We don’t have to meet, we have all the numbers.”
The president announced the tariffs in April, arguing they were correcting an unfair trade relationship and would return lost prosperity to US industries such as car-making.
-
Sports3 years ago‘Storybook stuff’: Inside the night Bryce Harper sent the Phillies to the World Series
-
Sports1 year agoStory injured on diving stop, exits Red Sox game
-
Sports2 years agoGame 1 of WS least-watched in recorded history
-
Sports2 years agoMLB Rank 2023: Ranking baseball’s top 100 players
-
Sports4 years ago
Team Europe easily wins 4th straight Laver Cup
-
Environment2 years agoJapan and South Korea have a lot at stake in a free and open South China Sea
-
Sports2 years agoButton battles heat exhaustion in NASCAR debut
-
Environment2 years agoGame-changing Lectric XPedition launched as affordable electric cargo bike