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Roula Khalaf, Editor of the FT, selects her favorite stories in this weekly newspaper.
The UK government is still in a bit of a quandary. As the cost of its borrowing has risen since the autumn, the chances of meeting its main financial rule – to borrow only for investment at the end of the decade – have decreased. This disruption has been met with strong rhetoric from the government. Whether it’s from Prime Minister Sir Keir Starmer, Rachel Reeves, her chancellor, or their spokespeople, adjectives describing fiscal policy tend to be confused between “ironclad” and “non-negotiable“. Their views are constant”fully committed“.
Sentiment has improved in the UK government bond market over the past week, but many still have to be convinced. Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, is not impressed, saying gilts could lead to “spiritual death“. Of course, this was an exaggeration, but his comments reflect growing concern in the financial markets that there is a gap between tough monetary rhetoric and the reality of UK monetary policy – and it is leading before the current Labor government.
What is needed to provide fiscal stability on which the UK economy can build is simple. There is no more language. There are no more announcements of firm monetary policy either now or in the future. Instead, Reeves needs to implement the tax increases and spending plans outlined in October without compromising when they will take effect in April.
These are great. Along with the large and reckless increase in employers’ national insurance, there is a continuing increase in income tax in the form of benefits and far from a general increase in public expenditure. Together, the steps are set to reduce the government borrows heavily. The overall deficit is expected to decline from 4.5 percent of GDP in 2024-25 to 3.6 percent in 2025-26, while the current budget deficit, excluding fiscal investment, will decrease from from two percent of GDP to 0.9 percent. at the same time.
This will be an exercise in showing, not telling. Cutting back on massive borrowing is unusual for UK governments – it will become clear in the summer whether Reeves and his policies are on track. Success would immediately show the difference between the UK’s monetary policy and that of similar countries.
In recent years, the US administration has demonstrated its inability to run a deficit below 6 percent of GDP, and no improvement in vision. The European Commission expects that France’s budget deficit will have exceeds 6 percent of GDP last year, with little hope of a political consensus to deliver much improvement. Germany’s public finances are strong, but its economy is weak. And credit levels in the UK, although higher, are still significantly lower than in Italy.
Bond markets often have their own views, but it would be difficult to single out the UK for special punishment if it is a developed country with the ability to pass laws to enforce a bond. finances and seeing it right. This is what Reeves should do. If growth falters, the Bank of England will be in a strong position to ease monetary policy and reduce monetary tightening.
There is no guarantee in the business of influencing the financial markets that they have a lot to lose if they bet against you. The UK government must also hope that consumers will start to use their recent gains and improve their growth. It needs to show that any expansion will come with a significant recovery in productivity. And that the increase in employers’ national insurance should not have a more damaging effect on jobs and prices than expected.
None of that will be achieved with a lot of talk about non-negotiable commitments to ironclad financial rules.
