Rising UK borrowing costs could lead Reeves to push for new public spending cuts | government borrowing

Rachel Reeves may be forced to make fresh cuts to public spending in her spring outlook in March as rising government borrowing costs risk the Prime Minister breaking his own fiscal rules.

As the government puts pressure on the economy, city analysts have warned that Britain's long-term borrowing costs are at their highest level since 1998, threatening to wipe out almost all of the $10 billion buffer the chancellor had set aside in his autumn budget.

Interest rates on Britain's 30-year debt rose 0.4 percentage points to 5.22%, hitting a 27-year high and surpassing the highest level since Liz Truss' mini-budget for 2022 sparked turmoil in financial markets.

Government borrowing costs have risen globally in recent weeks as investors weigh the prospect of stubbornly high inflation, forcing the world's most powerful central banks to hold off on interest rate cuts. Investors are also concerned that U.S. President-elect Donald Trump's policies could spark further inflationary pressures.

UK growth is expected to stagnate in the second half of last year, while inflation is still above the Bank of England's 2% target, limiting scope for cutting borrowing costs.

Economists have said that if the recent rise in bond yields continues, it will add to the government's debt servicing costs and could lead to the Office for Budget Responsibility (OBR) deciding that Reeves is on the path to breaking fiscal rules to balance things out. A day spent in taxes by 2029-30.

Ruth Gregory, deputy UK director at consulting firm Capital Economics, said the recent rise in borrowing costs suggested $8.9 billion of the chancellor's $9.9 billion in spare cash was lost.

After the recent volatility in the bond market, only about $1 billion remains, but an additional 0.06 percentage point increase in 20-year borrowing costs would wipe out all that headroom.

That means Reeves could soon face the unpleasant choice of breaking fiscal rules or announcing further tax increases and/or spending restrictions at a time when the economy is already weak, Gregory added.

Reeves is expected to present updated OBR forecasts on the economy and public finances to parliament on March 26. She signaled she was unlikely to announce tax and spending changes, saying she would hold a major fiscal event once a year to provide more stability for families and businesses.

City analysts have questioned whether the Prime Minister would miss the opportunity to take corrective action if the damning OBR ruling sparks speculation that Reeves could raise taxes.

But the Prime Minister promised no further tax rises after announcing plans to raise revenue by $40 billion in the autumn budget. The Treasury said on Tuesday that her fiscal rules were non-negotiable and indicated that any adjustments would result in spending cuts.

We will not pre-empt the OBR forecast. But no one should doubt the Prime Minister's commitment to economic stability and sound public finances. That's why meeting the fiscal rules is non-negotiable, a Treasury spokeswoman said.

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The Prime Minister has made it clear that he will not repeat the October budget and is now focusing on rooting out wasteful public spending and growing the economy through a spending review.

The rise in long-term borrowing costs occurred when the Treasury's Debt Management Office sold 2.25 billion shares of new 30-year bonds at a yield of 5.2%, which is the highest 30-year gold bond yield since May 1998 when Gordon Brown was prime minister. . .

The Bank of England forecast zero growth in the UK economy in the final three months of 2024 and warned inflation would remain above its 2% target until at least 2027. The economy contracted during the second month of October, with revised figures showing zero. Third quarter growth.

Investors have scaled back the number of interest rate cuts by central banks, with financial markets expecting only two rate cuts in 2025, compared to up to four expected a few months ago.

U.S. 10-year bond yields rose to their highest in eight months on Tuesday, amid investor concerns about Trump's policies and ahead of a Treasury auction for $US39 billion ($31.2 billion) in new debt.

Euro zone borrowing costs also rose as figures this week showed inflation surged to 2.4% in December, dampening expectations of a major interest rate cut from the European Central Bank later this month.

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