Reeves faces ‘challenging decisions’ on responsibility and spending

Chancellor Rachel Reeves faces “challenging decisions” if she wants to meet her self-imposed budgetary rules after borrowing costs hit their highest level for 16 years, the former deputy governor of the lender of England has warned.

Reeves has pledged not to borrow to fund day-to-day spending and to get obligation falling as a distribute of national returns by the complete of this parliament.

Sir John Gieve told the BBC the chancellor faced a selection between raising borrowing, increasing taxes or cutting back on community spending.

Reeves has just arrived in China for a three-day visit aimed at boosting trade and economic ties.

Opposition parties had called for her to cancel the trip after the pound fell to its lowest level in over a year and UK borrowing costs rose, but population Secretary Lisa Nandy said it was “absolutely correct and proper” that the chancellor went and took seriously the UK’s connection with China, the globe’s second largest economy.

She said the rise in borrowing costs was “a global pattern that we’ve seen affecting economies all over the globe”.

• Why are UK borrowing costs rising and what does it cruel for me?

Governments generally spend more than they raise in responsibility so they borrow money to fill the gap, usually by selling bonds to investors.

UK borrowing costs have been rising in recent months. The expense of borrowing over 10 years hit its highest level since 2008, while the pound has fallen and on Friday dropped below $1.22 against the dollar after stronger-than-expected job figures in the US.

When borrowing costs leave up, usually the pound does too, but analysts recommend wider concerns about the strength of the UK economy have driven sterling lower.

On Thursday, the Treasury ruled out any emergency intervention in the markets, saying they continued to “function in an orderly way”.

Globally, there has been a rise in the expense of government borrowing in recent months sparked by investor concerns that US President-elect Donald Trump’s plans to impose recent tariffs on imports from Canada, Mexico and China would push up worth rise.

UK sovereign debt – known as “gilts” and which the government uses to raise money – are normally considered very secure, with little hazard the money will not be repaid. They are mainly bought by budgetary institutions, such as retirement fund funds.

earnings rates – known as the gain – on sovereign debt have been going up since around August.

Sir John said what was happening to long-term yields in the UK reflected what was happening to yields in the US.

“[In] the US, markets are taking a different view of how their economy is going to leave once President Trump is in office and their rates have gone up to 4.75% on 10-year Treasuries and ours have gone up in parallel to that. So I don’t ponder this is a response to something we’ve done,” he said.

On Friday, US hiring figures surged for December, with 256,000 jobs added. Economists had expected 160,000 recent roles.

The stronger data, along with a tiny dip in the unemployment rate, reinforces the view that there is no pressure on the US Federal safety net to cut earnings rates quickly in order to boost the economy.

This could impact the path taken by the lender of England as policymakers closely watch moves made by their counterparts in the globe’s largest economy.

In response to the figures, the gain on 10-year US bonds rose to almost 4.79%, the highest in 14 months.

The gain on UK 10-year gilts, meanwhile, remained above 4.8%, the highest since August 2008.

Sir John said what was different about the UK was the Treasury had tried to reassure markets by saying it would stick to its budgetary rules.

“But it’s becoming clearer and clearer that that’s going to be very challenging,” he said.

Reeves has previously committed to only one budgetary occurrence a year – where she can raise taxes – which would likely be in a budgetary schedule in the autumn.

If she needs more money before that, a squeeze on spending is more likely.

On 26 March the government’s independent forecaster will put out its latest projections for the economy and will declare whether the chancellor is likely to meet her budgetary rules.

A spending review, which sets government department spending, will pursue in June.

Sir John said it would require challenging decisions from the chancellor in the spending review and then the budgetary schedule.

“The selection she’s going to face… is can I raise borrowing – and the boost in earnings rates that’s happened now, if it continues, will reduce her scope for doing that within her rules – or do I boost taxes again, or do I actually institute some very severe reductions and squeezes on community services.”

Reeves’ trip to China comes as the government is looking to revive an annual economic exchange with the country that has not been held since the pandemic.

Ties have been strained in recent years by growing concerns about the actions of China’s Communist leaders, allegations of Chinese hacking and spying, and its jailing of pro-democracy figures in Hong Kong.

The Conservatives and Liberal Democrats have criticised Reeves for proceeding with the planned trip rather than staying in the UK to address the expense of government borrowing and the slide in the worth of the pound.

Shadow chancellor Mel Stride accused Reeves of being “missing in action”, while Lib Dem chief Sir Ed Davey said the economy was “flying blind” with both the chancellor and lender of England governor abroad.

Sign up for our Politics Essential newsletter to read top political analysis, boost insight from across the UK and remain up to speed with the large moments. It’ll be delivered straight to your inbox every weekday.