Latest news with #publicfinances
Daily Mail
3 hours ago
- Business
- Daily Mail
Bond traders smell trouble: Reckless Reeves could spark a full-blown financial crisis, says MAGGIE PAGANO
There are times when the numbers published by the Office for National Statistics on the state of the economy are so mind-boggling that they become meaningless. Figures for June on the level of government borrowing are a case in point. On our behalf, Labour borrowed some £20.7billion last month – £6.6billion more than in the same month last year. It is the second highest June borrowing since records began, and was only eclipsed in 2020 at the height of the pandemic. This takes borrowing in the first three months of the financial year to £57.8billion, and if the forecasts are to be believed, suggests the total tally for this financial year will be £130billion, give or take a billion or two. That is more than any government department spends, other than health. Perhaps an extra £6billion a month doesn't sound too much. But here's a way of putting these numbers into some sort of perspective. How long do you think it takes to count to a million? If you take one number at a time – about a second each – it would take an average person 11 and a half days of continuous counting, or around 278 hours. Now estimate how long it takes to count to a billion. On the same non-stop basis, it would take someone an astonishing 31.7 years, and that's without eating or sleeping. So for June's extra £6billion, someone would have to count for roughly 192 years. That gives some context for the scale of the problems facing our public finances. If the economy was growing – and living standards rising – as a consequence of improved productivity, such a whopping debt mountain might not be such a problem. But it's not. Quite the reverse. June's horrifying monthly increase is because government spending outstripped tax receipts while the cost of interest payments on the country's nearly £3 trillion debt nearly doubled. What's more, the £16.4billion cost of interest payments on the debt was the second highest for June since 1993 due to inflation. This was £8.4billion more than in the same month last year, or put another way, £550million a day and more than £22million an hour. As Office for Budget Responsibility chairman Richard Hughes pointed out recently at the Treasury select committee, we have the sixth-highest debt, fifth-highest deficit and third-highest borrowing costs among 36 advanced economies. Which is why the UK gilt market is so skittish. Traders smell trouble ahead, particularly after the Government failed to get through even the most minor reforms to the welfare budget. Gilt yields on the 30-year benchmark government bond have been above 5 per cent for most of the year, breaking the 5.5 per cent mark last week – far higher than during the Liz Truss reign. Yet when Labour came to power, yields were below 4.5 per cent. Capital Economics claims that higher UK gilt yields since March have already cut the Chancellor's so-called 'fiscal headroom' from £9.9billion to £6.7billion. In the scale of things, the difference now comes down to a rounding error. While it is true that the cost of money has risen globally, the markets forecast that UK borrowing costs have further to climb, that the country is an outlier. What a mess. Rachel Reeves will need to whip up another £20billion to balance the books. But she doesn't have many options left, having lost the fight over cuts to the welfare budget. Her only choice is to raise taxes again. This in turn will scupper growth, leading to a state of stasis, if not a full-blown financial crisis. Trump's win Laugh all you like at Donald Trump's outlandish tariff threats but they often land him the prize. The President's latest win is the promise by AstraZeneca to invest $50billion in the US by the end of the decade as part of its plan to reach $80billion of sales. Rather than face potential tariffs of 200 per cent on imported drugs, the pharmaceuticals giant is going to build a new drug manufacturing factory for chronic diseases in Virginia. Having already lost out on AstraZeneca's plan to build a plant in the UK because of government incompetence, the powers that be must do all they can to ensure that the company will keep its primary listing in London and not switch to New York. That would be giving Trump too much of a win.
The Independent
7 hours ago
- Business
- The Independent
What surging cost of borrowing means for Rachel Reeves' tax plans
A bit of a shocker has emerged on the public finances, and it is unambiguously bad news. Britain borrowed some £20.7bn last month – the second-highest June figure since records began in 1993 and behind only the panicky pandemic year of 2020. It was £6.6bn higher than in June 2024, and as much as £16.4bn of the total was accounted for by debt interest. Worse than any of that, it was higher than City expectations. The gilts market was further discomfited. Pressure on the public finances is plainly not easing… Why is government borrowing so high? Inflation, is the short answer. It was up again last month and is likely to edge higher in the coming months thanks to a bump up in energy costs. About a quarter of UK debt is index-linked to prices, which means that any uptick in official inflation feeds directly through to the public finances. And domestic pressures on public spending remain acute. Britain's government pays more to borrow funds than most comparable advanced economies thanks to Brexit, Trump's trade wars, Covid recovery, and longer-term weakness in investment and productivity. What can Rachel Reeves do about it? Keep her job is one thing. During the welfare bill rebellion fiasco earlier this month, the rumour she might be sacked or quit pushed gilt yields higher, which in turn meant that raising new money would be even more costly. Yields subsided, but stability at the Treasury is a valuable asset in itself; markets fully expect another tough Budget, as does everyone. Given setbacks in social security spending and disappointing growth, she'll probably need to raise another £20bn to be on the safe side, to deal with future shocks and meet her own her 'iron clad' fiscal rules. What are her options? Mainly new taxes, and that includes sin taxes such as on gambling, sugar in food, or petrol and diesel. She might also tighten up tax breaks on pension savings, extend the freeze in income tax thresholds, and target capital gains (again). She might also ask the Bank of England not to pay so much interest on the deposits commercial banks keep with it; that might sort most of it out, but she'll still need to look again at aspects of public spending. There seems less hope that the two-child benefit cap will be lifted. What about her 'non-negotiable' fiscal rules? The person Reeves would have to negotiate with is Rachel Reeves, so it's possible she could persuade herself to tweak the rules again; but as she pointed out at the recent Mansion House dinner, rules about borrowing merely reflect the reality of market sentiment. If the market can tolerate another adjustment, it might happen – but probably not at the moment. Will the Bank of England still cut interest rates in August? Yes. The weight of expectations is too heavy and the Bank still judges that, a year to 18 months out, inflation will subside back toward the target rate of 2 per cent (absent any nasty surprises). So interest rates will be down to 4 per cent next month; after that, we may have a bit of a wait because service sector and wage inflation remain stubbornly elevated. Does any of this matter politically? Labour desperately needs to win a reputation for economic competence, and the image of a government not in control of spending and debt would dump the party out of office for another generation. A Tory or Reform government on the back of chaos would be a nailed-on certainty for the next election, whenever it comes. However, an immediate major crash, such as was seen after the 2022 Truss mini budget, the collapse of Sterling out of the Exchange Rate Mechanism in 1992, or the 1976 IMF crisis, doesn't seem likely. It's more of a long, thankless and politically bruising slog for the next few years to get the public finances on a sustainable basis. Contrary to some predictions, Reeves may have to have longer in her 'dream job' than even she might wish for.
Bloomberg
12 hours ago
- Business
- Bloomberg
Why Rachel Reeves Should Resist a UK Wealth Tax
It's impractical, it's self-defeating, and it would make Britain's already narrow tax base even more fragile. Welcome to the award-winning Money Distilled newsletter. I'm John Stepek. Every week day I look at the biggest stories in markets and economics, and explain what it all means for your money. You might — just might — already be aware of this, but the UK's public finances are in a sorry state. New figures out today showed that public borrowing was higher than analysts surveyed by Bloomberg had expected in June.
The Independent
13 hours ago
- Business
- The Independent
Rachel Reeves under pressure as UK borrowing higher than forecast in June thanks to soaring debt interest costs
Chancellor Rachel Reeves is facing further pressure over the UK's public finances after official figures showed higher-than-expected government borrowing last month due to soaring debt interest payments. The Office for National Statistics (ONS) said June borrowing rose to £20.7 billion last month – £6.6bn higher than a year earlier and the second highest June borrowing since records began, only behind that seen in 2020 at the height of the pandemic. The ONS said interest payable on debt jumped to £16.4bn due to a large rise in Retail Prices Index (RPI) inflation impacting index-linked government bonds. June borrowing was higher than the £17.6bn expected by most economists and the £17.1bn forecast by Britain's independent economic forecaster, the Office for Budget Responsibility (OBR). The figures have stoked fears that the government will be forced to hike taxes in the autumn budget, with experts warning over 'sin taxes' among measures to help the chancellor balance the books. Bank of England governor Andrew Bailey told MPs on Tuesday he was 'not unconcerned' by increased government borrowing. But Mr Bailey stressed in the Treasury Select Committee session that it was part of a global trend. 'The cost of borrowing has increased… but the important thing to say is that it is a global phenomenon,' he said. Borrowing for the first three months of the financial year to date stood at £57.8bn, £7.5bn more than the same three-month period in 2024, according to the ONS. The ONS said so-called compulsory social contributions, largely made up of national insurance contributions (NICs), jumped by £3.1bn to £17.5bn last month – the highest ever recorded for June. In the first three months of the financial year to date, these compulsory social contributions rose to £48bn, up £7.5bn year on year and marking another record. It followed the move by Rachel Reeves in April to increase NICs for employers, which has seen wage costs soar for firms across the UK as they also faced a rise in the minimum wage in the same month. Public sector net debt, excluding public sector banks, stood at £2.87trn at the end of June and was estimated at 96.3 per cent of gross domestic product (GDP), which was 0.5 percentage points higher than a year earlier and remains at levels last seen in the early 1960s. Darren Jones, chief secretary to the Treasury, said: 'We are committed to tough fiscal rules, so we do not borrow for day-to-day spending and get debt down as a share of our economy.' Economist Rob Wood, at Pantheon Macroeconomics, said the chancellor has a 'major problem' to overcome, 'created by U-turns on previously planned spending cuts and possible downgrades to OBR growth forecasts this autumn'. He said: 'We estimate that the chancellor's £9.9bn of headroom has turned into a £13bn hole, meaning that Ms Reeves would need to raise taxes or cut spending by a little over £20bn in the autumn budget to restore her slim margin of headroom. 'We expect 'sin tax' and duty hikes, freezing income tax thresholds for an extra year in 2029 and a pensions tax raid – reinstating the lifetime limit on pension pots and cutting relief – to fill most of the hole.' Shadow chancellor Sir Mel Stride said: 'Rachel Reeves is spending money she doesn't have. 'Debt interest already costs taxpayers £100bn a year – almost double the defence budget – and it's forecast to rise to £130bn on Labour's watch.' Nabil Taleb, economist at PwC UK, said: 'The OBR recently reported that the UK now has the third highest borrowing costs among advanced economies and with global uncertainty persisting, particularly around the impact of US policy, the cost of servicing UK debt could climb even higher.'
The Guardian
17 hours ago
- Business
- The Guardian
Rachel Reeves faces gloomy autumn after borrowing overshoots
June's public finances data, published on Tuesday, make a depressing end-of-term report card for Rachel Reeves, as MPs prepare to depart Westminster for the summer recess. The Office for National Statistics (ONS) said public borrowing jumped to £20.7bn last month – a full £3.5bn higher than expected by the independent Office for Budget Responsibility (OBR). That made it the second-highest figure for any June on record, aside from in the Covid-hit year of 2020, when the government was paying millions of workers' salaries through the furlough scheme. The current deficit for the month, which Reeves watches closely, as her key fiscal rule aims to eliminate it in five years' time, was £16.3bn – £7.1bn more than the equivalent month in 2024. The overshoot appears to have been driven not so much by a spendthrift Labour Treasury, but by higher-than-expected interest costs for government bonds, or gilts, some of which rise automatically with inflation, as measured by the traditional retail prices index (RPI). Inflation has been climbing in recent months, hitting 4.4% on the RPI measure. The Treasury paid £16.4bn in interest on gilts in June, the ONS said – almost twice the £8.4bn of the same month a year ago, and £2.4bn more than the OBR expected. The news doesn't look nearly so bad when the first three months of the new financial year are taken as a whole, however – the ONS says the £57.8bn of borrowing over this period is in line with what the OBR forecast in March. That suggests, at least, that the watchdog need not start its autumn budget forecast from a baseline that has already drifted way out of line with its March expectations. But the worse-than-expected June figure underlines how delicate the chancellor's situation remains, with headroom of just £9.9bn at the end of the five-year forecast period, according to the OBR – some of which has already been eaten up by the reversal of the £5bn disability benefits cuts, and the £1.25bn cost of restoring the winter fuel allowance to most pensioners. Potentially much larger than that is the impact of the OBR's summer forecast 'stocktake', which will revisit its economic modelling and could result in significant revisions, perhaps of £10bn or even £20bn according to some forecasters, which Reeves will then have to contend with in the autumn. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion The Institute for Fiscal Studies suggested a shift to Reeves's framework on Monday that would free her from the need to adjust policy in spring statements, in response to relatively small swings in forecasts. The chancellor's team are considering the role of the OBR forecasts, and this kind of change could help to avoid a repeat of the hasty target-driven policymaking that ultimately led to the welfare U-turn. But none of it appears likely to rescue the chancellor in time for what looks likely to be a very tough budget in the autumn – made no easier at all by the worse-than-expected state of the public finances for June.
