Labor is pushing for growth to avoid “dangerous” tax rises.

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The UK government is drawing up new growth strategies in a bid to avoid a “dangerous” tax hike after a week of market shocks threatens to derail its policy agenda.

UK borrowing costs rose to near 16-year highs on Friday, closing worst week of the year for the gilt market following a sell-off that plunged the pound and left the government scrambling to reassure investors about the state of public finances.

When Rachel Reeves returns from a trip to China on Monday, the chancellor plans to present a convincing “growth story”, including new economic policies, in a scheduled speech expected later this month, according to officials.

Officials say the government is determined to avoid further tax rises on top of the £40bn package it put in place in October, with one saying “it would be an absolute disaster”.

Instead, the government wants growth and controls public spending accordingly a devastating increase in government borrowing costs.

Officials and ministers intend to reduce the chances of reducing the budget of the departments in the next budget review which, according to people familiar with the process, will be held on 11 June.

As part of its growth plan, Labor plans to change the “written” system in which different departments agree to develop joint policies.

“Departments will be asked if the policy will have a positive effect on growth and if the answer is yes, we will do it – as a broad principle,” said an official of the Department of Finance.

At the same time, departments will also be given a firm message during the spending review process that if they push for policies that are “draining growth” then they will have to be “reviewed”.

But economists have warned that the sell-off in the gilt market has exposed serious weaknesses in the party’s policy for the economy and public finances, criticizing the government for failing to build enough margin for the negative changes in the October Budget, and slow to elaborate. growth efforts.

“Now they need to show that they are committed to solving the UK’s financial problems in a world of high prices,” said Ben Nabarro, UK economist at Citigroup. “That means dealing with weak structural growth. But they are also misguided if they think growth alone can get them out of this financial hole. More spending and tax changes are also needed.”

The Bank of England says the economy has failed to grow in the last quarter of 2024, after reading a smaller-than-expected GDP at the end of last year. Business surveys revealed a loss of confidence following the tax hike in the October Budget.

The 10-year yield ended the week at 4.85 percent, up 0.25 percent from the previous week, while sterling fell below $1.219its weakest against the dollar since November 2023. Shares in the domestically-focused FTSE 250 index fell 4 percent this week, the biggest decline since June 2023 .

Reeves’ October budget, which included a sharp increase in borrowing, has fallen victim to a sharp sell-off in global bond markets due to renewed inflation fears.

That has sent government bond yields higher across the board as investors bet that central banks will be slow to cut interest rates. This combined with investor concerns about the UK economy to push the country’s spending to a 30-year high this century.

“As yields increase, the financial situation worsens,” said Mark Dowding, chief investment officer for fixed income at RBC Bluebay Asset Management.

Strong US jobs numbers added to the pressure on the bond market on Friday, prompting traders to bet on an even slower pace of interest rate cuts from the Federal Reserve. The next key moment for gilts will be next week’s UK inflation figures.

The area where Reeves will highlight the biggest changes is by giving an update on the “new planning and infrastructure bill” which is due to be introduced in the House of Commons in March and aims to speed up development.

One senior Labor MP said: “The government desperately needs to deliver a growth plan… and that is more important than ever for businesses facing high national insurance, a package that new job rights and higher wages.”

One Labor expert said the latest polls that put Labor on 24 per cent made him want to “bang my head on the table”, although they said Starmer’s leadership was safe for at least another year. “If Labor starts to look like they don’t have a coherent or sensible story to sell the market, then they will be destroyed, won’t they?”

Data visualization by Keith Fray