Reeves’s fearsome challenge: to balance backbenchers and bond markets
It was Bill Clinton’s political adviser James Carville, way back in the 1990s, who said that in another life he would like to “come back as the bond market” – in preference to a president or a pope – because “you can intimidate everybody”.Even Donald Trump, that most wilful of politicians, has been forced to retreat in the face of bond market moves in recent months, ditching the most extreme of his “reciprocal” tariffs after US Treasury yields jumped.And despite the traditional status of US Treasuries (government bonds) as a safe haven for global investors, it is still not clear how well financial markets will be able to swallow the $3.3tn increase in debt coming down the tracks if Trump’s “big beautiful bill” is passed.So when investors dumped gilts (UK government bonds) on Wednesday, as Rachel Reeves wept in the Commons, it was an abrupt reminder that Labour backbenchers were not the only audience the government must placate.
Like many other major economies hit by a succession of shocks in recent years, the UK’s relatively large debt pile means policymakers have to keep one eye on the markets they are relying on to fund their borrowing,And some analysts argue that the UK appears particularly vulnerable to crises of investor confidence, after the Liz Truss debacle of 2022,Given this backdrop, Reeves’s team have always said their strict fiscal rules are not “self-imposed” but there to prevent the government running up against the real-world constraints of the bond markets,As the chancellor put it in a recent speech, “it is not me ‘imposing’ borrowing limits on government,Those limits are the product of economic reality.
”Wednesday’s bond market moves supported her point, with the yield (in effect the interest rate) on government debt ticking up, as Keir Starmer appeared to hesitate in giving the chancellor his full backing.The market move suggested that, while Reeves may have lost credibility with Labour backbenchers after what many see as catastrophic misjudgments over winter fuel and welfare cuts, she does, apparently, retain the confidence of the bond markets.That matters, because this Labour government is operating in a very different, much more constrained fiscal environment than its predecessors.Government debt in the UK was running at about 30% of GDP in the early 00s, when Tony Blair was prime minister.Then came the global financial crisis, prompting multibillion-pound bailouts and a deep recession, and more than doubling the debt-to-GDP ratio to 70% by the time Labour left office.
The decade and a half since has been marked by sickly economic growth, and another two “once in a lifetime” economic shocks: Covid, and the energy crisis prompted by Russia’s invasion of Ukraine.Sign up to Business TodayGet set for the working day – we'll point you to all the business news and analysis you need every morningafter newsletter promotionGovernment debt is now close to 90% of GDP and is heading higher.The interest on that has cost the taxpayer more than £100bn in the last fiscal year – as much as 8% of public spending.In other words, what appear to be tiny moves in interest rates, if sustained, can cost taxpayers billions.The fact that Reeves’s “headroom” against her fiscal rules evaporated between the autumn budget and March’s spending review was caused more by rising interest rates on government debt than a slowing economy – and this was driven as much by global events, including US tariffs chaos, as by decisions at home.
Reeves hopes the squeeze on the public finances will ease as economic growth picks up – but that feels challenging, given the highly uncertain international context and the unavoidably long-term nature of many of Labour’s pro-growth policies.By Thursday, the jump in gilt yields had partly reversed, after Starmer made clear Reeves continued to have his backing – perhaps not surprisingly, as there is scant evidence he wants to abandon her broad approach.Some of the chancellor’s allies argue that she has emerged strengthened for the internal rows ahead, because she can point to investors’ jitters to show there are limits to what the markets will tolerate.But after this week’s welfare climbdown, her autumn budget looks like a fearsomely difficult balancing act, between restive backbenchers and sceptical investors.
How to balance the UK books: six options open to Rachel Reeves
Rachel Reeves is under pressure to tackle a multibillion-pound shortfall in the government finances.Labour’s high-stakes welfare U-turn and a spike in bond markets triggered by speculation over the chancellor’s position has dragged the government’s tax and spending plans into the spotlight.Ministers have warned of “financial consequences” after the backtracking on disability benefits and winter fuel payments for pensioners, which have a price tag north of £6bn.Alongside a sluggish economic outlook and potential downgrade in productivity forecasts from the Office for Budget Responsibility at the autumn budget, economists at Deutsche Bank warn that Reeves could face a £30bn shortfall against her self-imposed fiscal rules.This has raised questions over how the chancellor responds
Trump celebrates tax bill passing, Reeves must boost headroom to £30bn, says ex-Bank of England deputy – as it happened
Time to recap…Donald Trump is preparing to send letters to trading partners, setting out tariff rates that countries will have to pay from the beginning of next month.The US president has said he will send out about “10 or 12” letters on Friday, with further letters over the next few days, as the 90-day pause on his “reciprocal tariffs” comes to an end.Trade tensions are bubbling at the second biggest economy in the world too. China announced new tariffs of up to 35% on brandy from the European Union, condemned as ‘unfair’ by an EU spokesperson.The Chinese tariffs will range from 27
Minister demands overhaul of UK’s leading AI institute
The technology secretary has demanded an overhaul of the UK’s leading artificial intelligence institute in a wide-ranging letter that calls for a switch in focus to defence and national security, as well as leadership changes.Peter Kyle said it was clear further action was needed to ensure the government-backed Alan Turing Institute met its full potential.In a letter to ATI’s chair, seen by the Guardian, Kyle said the institute should be changed to prioritise defence, national security and “sovereign capabilities” – a reference to nation states being able to control their own AI technology.The call for new priorities implies a downgrading of ATI’s focus on health and the environment, which are two of three core subjects for the institute, alongside defence and security, under its “Turing 2.0” strategy
Skirting the issue: Designer dress goes missing from Bezos-Sánchez wedding
Lauren Sánchez packed 27 designer dresses for her wedding to the billionaire Amazon founder, Jeff Bezos, in Venice last week, but left with only 26 after one went missing.The couple, who are now honeymooning in Taormina, Sicily, were wed during a star-studded three-day celebration in the lagoon city.They left Venice on Sunday, but mystery over the missing dress has generated chatter in Venice, with Corriere della Sera claiming that it was stolen, possibly by someone who evaded security and gatecrashed a party on the tiny island of San Giorgio, where the couple exchanged rings, on Friday. The newspaper said the number of gatecrashers to the event was such that officers from the local unit of Italy’s anti-terrorism squad, Digos, were called to the island.The newspaper also alleged a vintage Dolce & Gabbana-designed dress, either worn by the bride or wedding guest Ivanka Trump, was torn and caught fire during another party
England v India: second men’s cricket Test, day three – live
87th over: England 395-7 (Smith 173, Carse 0) What does Smith do now? He’s been patient for a while … but a counter could be on the way.Deep gets one to woosh past Woakes’ outside edge. There’s not been any insane movement with this ball but just enough to force England into a period of survival. Woakes tries to break the pressure … but the drive produces an outside edge and it’s gobbled up at first slip!86th over: England 395-6 (Smith 173, Woakes 5) Siraj, relentless and encouraged by the harder Dukes, keeps Smith stuck on 173. A rare maiden
Wimbledon 2025: Norrie in action, Kartal and Fritz win, Keys and Osaka out – live
… we do get to find out what Fritz makes of his victory, though. Unsurprisingly, he’s very happy. And remarkably he says that his body is feeling better as the rounds go by, despite two five-setters and a four-setter today, in which he also had two medical timeouts for blisters and an elbow problem.“Hello Katy,” emails Michael Cosgrove. “D-Fok is indeed a convenient way of typing Davidovich Fokina’s name, but always remember the golden rule which stipulates that one should never precede ‘D-Fok’ by ‘what’
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