Chancellor Rachel Reeves faces budget squeeze as UK borrowing hits record high

The pressure is on for UK Chancellor Rachel Reeves as the government grapples with tough decisions on long-term borrowing costs and fiscal policy. The gap between UK and German bond yields has widened, sparking concerns among investors about Reeves’ forthcoming Budget and economic plans. The editor of the FT, Roula Khalaf, handpicks key stories for insight into these critical financial matters. Here’s an overview of the challenges and considerations facing the government:

• Higher Borrowing Costs: The spread between UK and German benchmark bond yields has hit a new high, standing at 1.94 percentage points. This surge indicates investors’ apprehension over increased debt, rising inflation, and the potential impact on the Treasury’s borrowing ability. Chief investment officer, Mark Dowding, emphasizes the necessity for Reeves to strike a delicate balance in her Budget to prevent a gilt sell-off and maintain market confidence.
• Taxing Concerns: Reeves faces obstacles in filling a significant budget gap without resorting to drastic tax hikes. Despite this, the government is evaluating relaxation of borrowing rules to facilitate investments and propel fiscal growth. New fiscal frameworks, potentially involving public sector assets and liabilities, could see the light of day to address these pressing funding challenges.
• Borrowing Headroom: A groundbreaking recommendation from the Institute for Public Policy Research proposes a reevaluation of the government’s debt reduction targets. By using a broader measure called “public sector net worth” as a metric for borrowing capacity, Reeves could unlock around £57 billion in headroom for strategic investments and financial stability. Such innovative approaches could serve as a buffer against economic uncertainties and aid in navigating the uncharted waters of fiscal policy.

In the wake of these developments, Reeves must tread carefully to navigate the intricate landscape of fiscal policy. Striking a chord between economic stability, investment priorities, and debt management will be pivotal in setting the course for the country’s financial future. As investors await the unveiling of Reeves’ Budget, one thing remains clear – sound fiscal decisions and prudent investments are key to steering the UK towards sustainable growth and prosperity.