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.
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Council failings a factor in death of foster carer run over by child, inquest finds
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Where does the welfare bill climbdown leave UK public finances?
Keir Starmer managed to avert a parliamentary defeat over his main welfare bill on Tuesday, but only by removing a central element. So where does the government’s latest climbdown leave the public finances?Cuts to the personal independence payment (Pip) announced at Rachel Reeves’s spring statement in March were meant to save the Treasury £5bn a year.Ministers’ changes to the bill last week to try to avoid a Commons defeat – reversing some cuts to universal credit and applying the stricter Pip eligibility rules only to new claimants – had already reduced that saving to about £2bn.After stripping the Pip changes out of the bill completely on Tuesday, the Resolution Foundation estimates there will be no savings in five years’ time – leaving a £5bn hole in the chancellor’s plans.Reeves also faces a £1
Chris Whitty says culture-war coverage of cycling could harm nation’s health
Culture war-based coverage of cycling based on stereotypes of middle-aged men in Lycra could harm the nation’s health because it shifts focus away from the people and communities who benefit from physical activity, Chris Whitty has said.Speaking a day before the launch of the NHS’s 10-year-health plan, which is expected to focus heavily on prevention, the chief medical officer for England called on people to set aside media cliches and instead focus on “data which nobody can dispute”.If active travel “is seen as something which is simply the reserve of middle-aged, Lycra-clad people cycling possibly too fast around the park, that completely misses the point of actually where the huge health gains are”, Whitty told a conference in York.He said: “There are some areas where you can send a debate from a cultural war into a much more day-to-day one by actually saying, ‘OK guys, but this is the maths,’ and ensuring that you do so with facts which people find surprising.“So for example, the culture wars will always try and paint the person who’s in favour of active transport, and let’s say cycling, as middle-class, entitled, speeding like a bad person
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