No room for Treasury complacency as UK hit by toxic cocktail of market shifts
No chancellor much likes it when the pound takes a tumble. No chancellor much likes it when the yield on their government debt – the interest rate paid by the state – climbs to historic highs.
When these two things happen on the same day, and in the run-up to a hotly-awaited Budget… well, that’s the last thing any chancellor ever wants to see coming up on their screen. Yet that was the toxic cocktail that awaited Rachel Reeves on the terminal screens in the Treasury on Tuesday morning.
The pound dropped by more than a percent against the US dollar, while the yield on 30-year government debt (known as gilts) rose to the highest level since 1998.
The real question now is: how much does she have to worry about it and, more to the point, what can she do about it?
Let’s start with the first question first. Bond yields are a measure of the interest rate paid on debt and, in the case of government debt, they are influenced by all sorts of things. This makes interpreting their movements quite tricky, at the best of times.
For in one respect, they are a proxy for how creditworthy (or not) investors think a government is. If they think a country is about to default on its debt (Greek bonds and the euro crisis are perhaps the best example) then they might sell a country’s bonds and, lo and behold, the interest rate on those bonds goes up.
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Inflation up by more than expected
But in another respect they also reflect what people think will happen to inflation and interest rates in the coming years (or, in the case of long-dated bonds like the 30-year gilt, the coming decades). So, if you think inflation is going to be higher for longer, then all else equal, you would expect gilt yields to be higher, since that implies the Bank of England will have to keep its interest rates higher. It all feeds into the government bond yield.
Nor is that the end of it, because these yields are also affected by all sorts of other things: how much demand is there from pension funds? What’s the impact of the ageing population? How fast is the country going to grow? All of these things (and more) can have a bearing on the bond yield.
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All of which is to say, there’s rarely a single explanation for phenomena like the one we’ve got today. Consider the higher 30-year bond yields faced by the UK. On the one hand, there’s a compelling explanation served up by the Whitehall and parliamentary drama of recent months.
The government has failed to pass some key legislation cutting welfare spending. It has also had to do a U-turn on cutting winter fuel payments. Those two decisions mean it is left with a sizeable hole in the public finances in the coming years. That in turn makes it considerably more likely that it might have to borrow more, which in turn means investors might be getting more worried about Britain’s indebtedness. That’s totally consistent with higher gilt yields. And so perhaps it’s no surprise that the UK’s 30-year bond yield is considerably higher than other G7 nations.
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Tax rises playing ’50:50′ role in rising inflation
But it’s not quite that simple. For one thing, Britain is far from the only country in the G7 with a public finances problem. France and the US have deficit trajectories that look considerably less controlled than Britain’s. Nor is it evident from other measures of fiscal concern – for instance, the credit default swaps insuring against a country going bust – that Britain is an outlier.
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Now consider another datapoint: inflation. Britain has the highest inflation rate in the G7, by some margin. In other words, part of the explanation for the UK’s high yields is that markets are fretting not just about fiscal policy (the stuff done in Whitehall) but monetary policy (the stuff done by the Bank of England in the city).
Now, in practice these two worlds bleed into each other. Part (though certainly not all) of the reason inflation is high is those National Insurance hikes introduced by the Labour government.
In short, this is a bit more complicated than some of the more breathless commentary in recent weeks might have you believe. Even so, regardless of how you balance those explanations, there is no doubting that Britain finds itself in a tricky position.
This combination – of high inflation, weak economic growth and a large and swelling budget deficit – is precisely the economic cocktail that landed the Labour government of the mid-1970s with an IMF bailout. We are a long, long way from anything like that happening this time around. But the ingredients are familiar enough that no one should be altogether complacent.
After all, the last time a government got overly complacent about these factors, back in 2022, we all know what happened next. The mini-Budget, a vertiginous spike in bond yields and a period where Britain’s financial markets stared into the precipice. Best not to repeat that again.
Manchester Pride has been put into voluntary liquidation and is being assessed by the charities regulator, with the future of the event in doubt.
Artists, suppliers and freelancers have been left unpaid, some of them owed thousands, the performers’ and creatives’ union Equity said.
After nearly a week of speculation and a period of financial difficulty, Pride’s organisers cited rising costs, declining ticket sales and an unsuccessful bid to host Euro Pride as factors behind the decision.
The organisation is a charity and limited company that campaigns for LGBTQ+ equality and puts on the annual parade and live events.
The company had been in financial difficulty, according to latest accounts, and gone through a series of directors in recent months. All three directors appointed in August resigned this month.
An up-to-date picture of Manchester Pride’s finances is not available, as the last update was submitted in September 2024 for the year up to December 2023, showing a consolidated deficit of nearly £500,000.
At that point, the company said it could continue to exist, as a “going concern”, as it said a review of the charity’s strategy would take place, detailed budgets and cash forecasts had been prepared for 2024 and 2025, and it had been in surplus up to August 2024.
Manchester Pride said at the time it had a plan to diversify income streams and rebuild cash reserves.
Accounts for 2024 are not due until 31 December this year.
A scene from Manchester Pride 2024. Pic: AP
As a charity, Manchester Pride Limited is regulated by the Charity Regulator, which said it had opened a compliance case “to assess concerns raised” about the organisation. “We are engaging with the trustees to help inform any next regulatory steps,” a spokesperson said.
It’s understood that Manchester Pride submitted a serious incident report relating to its finances.
What went wrong?
Directly impacted by the liquidation is freelance event manager Abbie Ashall, who is owed £2,000 after her pay day was missed in September.
Ms Ashall said she was not the worst hit; others are out of pocket even more, having hired and paid people for events they were contracted to put on, all with the expectation of being paid by Manchester Pride.
She had been an employee of Manchester Pride from summer 2023 to January 2025, but left to go freelance when staff members left and were not being replaced, raising concerns about resources to deal with an increasing workload. It was at that point that she assumed things were not going well financially.
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She continued to work for the organisation on a freelance basis, project managing the 2025 parade and now producing a musical, Spraywatch: A Beautiful Rescue.
Manchester Pride’s difficulties can, in part, be attributed to its model of getting people to pay for a wristband to access sites which are public spaces.
“I don’t think that the business model worked at the end of the day,” Ms Ashall said.
“And I think not enough people were buying tickets… we’re seeing a massive trend in the events and festival industry that people just are not buying”.
What next?
Creatives waiting to be paid have been urged to contact the Equity union.
“We are collecting contractual information to pursue all options to recoup money owed, and we will begin these processes immediately,” said Equity’s North West official, Karen Lockney.
“We are also speaking with Manchester City Council and other stakeholders to ensure artists’ voices are heard in discussions about the future of Pride in the city, ensuring that Manchester gets the Pride it deserves”.
Details of those owed money have been passed to the liquidators, Manchester Pride’s board of trustees said in a statement.
What does this mean for Pride in Manchester?
A Pride celebration will take place in August next year with council support, Manchester City Council said.
“There will undoubtedly be anxiety about what the future holds – but Pride is much more than the organisation that runs it. We want to support a new chapter for Manchester Pride weekend, which will take place next August.
“The council will play a full and active role in bringing together the LGBTQ community to help shape how the city moves forward to ensure a bright and thriving future for Manchester Pride.”
You know bad economic news is looming when a Chancellor of the Exchequer tries to get their retaliation in first.
Treasury guidance on Tuesday afternoon that Rachel Reeves has prioritised easing the cost of living had to be seen in the light of inflation figures, published this morning, and widely expected to rise above 4% for the first time since the aftermath of the energy crisis.
In that context the fact consumer price inflation in September remained level at 3.8% counts as qualified good news for the Treasury, if not consumers.
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The figure remains almost double the Bank of England target of 2%, the rate when Labour took office, but economists at the Bank and beyond do expect this month to mark the peak of this inflationary cycle.
That’s largely because the impact of higher energy prices last year will drop out of calculations next month.
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Inflation sticks at 3.8%
The small surprise to the upside has also improved the chances of an interest rate cut before the end of the year, with markets almost fully pricing expectations of a reduction to 3.75% by December, though rate-setters may hold off at their next meeting early next month.
September’s figure also sets the uplift in benefits from next April so this figure may improve the internal Treasury forecast, but at more than double the rate a year ago it will still add billions to the bill due in the new year.
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For consumers there was good news and bad, and no comfort at all from the knowledge that they face the highest price increases in Europe.
Fuel prices rose but there was welcome relief from the rate of food inflation, which fell to 4.5% from 5.1% in August, still well above the headline rate and an unavoidable cost increase for every household.
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The chancellor will convene a meeting of cabinet ministers on Thursday to discuss ways to ease the cost of living and has signalled that cutting energy bills is a priority.
The easiest lever for her to pull is to cut the VAT rate on gas and electricity from 5% to zero, which would reduce average bills by around £80 but cost £2.5bn.
More fundamental reform of energy prices, which remain the second-highest in Europe for domestic bill payers and the highest for industrial users, may be required to bring down inflation fast and stimulate growth.
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