Chancellor Rachel Reeves has said the government was reliant on bond traders as part of an effort to fix “precarious” public finances in a pointed dig at Labour’s Manchester Mayor Andy Burnham.
In a panel discussion in front of an audience of centre-left figures on Friday, Reeves struck a defiant tone against mooted criticism she had been “in hock to the bond markets”, a comment made by Labour’s Burnham in an interview with the New Statesman.
She defended the importance of “securonomics” and keeping public finances on stable ground, hitting back at left-wing critics who suggested the government should borrow more.
“When we campaigned just over a year ago, I said and we said as a party that we would stabilise the economy, bring back some economic fiscal order,” Reeves said.
“Some people think that was just for an election and that those rules can be somehow relaxed.
“There are limits to what governments can do.”
Reeves also emphasised that her fiscal rules were looser, allowing the government to spend more on capital investment, and added that a key mission was to reduce debt servicing costs.
She pointed out that expenditure on debt interest payments totalled the budgets for the Ministry of Defence, the Home Office and the Ministry of Justice combined.
When asked whether bond markets mattered, she responded: “Of course they matter.”
“People can see that our public finances are still pretty precarious. We do have to explain how we will make the sums add up.”
“We are reliant on bold holders. Otherwise, we wouldn’t have the money to fund public services.”
In later comments, she also emphasised the importance of maintaining stable inflation to prevent higher prices from affecting British families, in reference to her efforts to ease cost pressures at the Budget.
Rachel Reeves’ difficult decisions ahead
Her appearance followed panel events featuring the likes of Canada’s Mark Carney, Spain’s Pedro Sánchez, and former New Zealand Prime Minister Jacinda Ardern.
Reeves’ comments point to the pressures she faces ahead of this year’s crucial Budget, with her £9.9bn headroom all but guaranteed to be wiped out by lower growth forecasts, higher borrowing costs and U-turns on welfare policies.
The Treasury believes it will have to plug a shortfall of around £30bn, according to ITV News.
The costs of defence expenditure are also set to spiral in the long term as the UK has committed to raising defence expenditure to 3.5 per cent of GDP by 2035.
Defence secretary John Healey emphasised the importance of the “dividend” of extra expenditure for creating jobs across the UK and boosting growth in an earlier event at the Global Progress Summit in London.
Tax hikes in the pipeline
Taxes on everything from pension pots to gambling firms are likely to be hiked later this year.
Reeves is also expected to unveil sweeping reforms to property taxes, including reforms to stamp duty that would stagger payments over several years, among options being discussed within the Treasury, City AM understands.
Starmer’s government could also look to put welfare reforms back on the table as part of an effort to make billions of pounds in savings.
Dozens of Labour backbenchers rebelled against the government to make small £5bn savings earlier this year, suggesting that re-introducing changes to benefits for inactive people could be contentious.
There are also growing pressures from backbenchers for Reeves to ditch her fiscal rules and pay less attention to the bond markets.
Debt interest payments to gilt holders are set to rise above £110bn within years, according to the Office for Budget Responsibility (OBR), reflecting the lurking threat to the Labour government and a breakdown in trust with its lenders.