(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves said Britain will meet its fiscal rules “at all times,” blaming the recent spike in UK borrowing costs on global market volatility and deflecting questions on how she plans to stabilize Britain’s public finances.
“I don’t believe that it’s reasonable to suggest that the reason why bond yields in the United States, Germany and France have risen is because of decisions made by this government,” Reeves said in the House of Commons on Tuesday, as she told a Conservative MP to “get real” for suggesting her policies have contributed to a selloff in UK bonds. “There’s been global volatility in markets.”
Reeves was making her first statement in Parliament since the market slide, which has seen British stocks, bonds and the pound all fall in recent days, with gilt yields rising to their highest levels since the financial crisis in 2008 and the pound hitting its lowest in 14 months. On Tuesday, the UK paid the most in decades to sell 30-year inflation-linked debt, the latest sign of market pain.
The market moves have raised questions over how Reeves will repair Britain’s fiscal position, given that a higher debt interest bill puts her on course to be in breach of her main fiscal rule for day-to-day spending to be covered by tax receipts.
“We remain committed to those fiscal rules and we will meet them at all times,” the chancellor told the Commons.
Nevertheless, economists, including at Deutsche Bank and Capital Economics, have warned that the recent surge in bond yields means that the £9.9 billion ($12 billion) of fiscal headroom Reeves enjoyed at the time of her budget at the end of October has likely been wiped out.
The Treasury is considering reducing public spending to address the situation, people familiar with the matter have told Bloomberg, though Reeves has declined to say so explicitly to MPs.
The key date looming for Reeves is March 26, when the Office for Budget Responsibility, the government’s fiscal watchdog, is scheduled to deliver its latest economic forecasts. The OBR will say then whether or not Reeves is in breach of her fiscal rules — and that’s when the chancellor would have to reveal any potential spending cuts or tax increases to ensure her rules are still met.
The watchdog typically locks in its market assumptions a month or more before an announcement, suggesting that if bond yields come down from recent highs between now and late February, Reeves may not be forced into taking fresh action on taxation, spending or borrowing in order to meet her strictures.
The chancellor is grappling with the UK being at the center of a global bond market storm, driven by signs of an overheating US economy and the threat of a new round of damaging trade wars after incoming President Donald Trump’s inauguration on Jan. 20. She’s also paying the price for baking in such a slim margin of error at her budget, leaving her vulnerable to this type of market reaction.
There was a modicum of respite for Reeves on Tuesday with bond yields holding steady, UK stocks inching higher, and the government receiving solid demand for its sale of 30-year inflation-linked bonds. But UK 10-year gilts now pay about 4.9%, more than 100 basis points higher than just four months ago, the pound remains under pressure, and in the debt auction, the government had to pay the highest real yield in decades.
There’s still potential for the market pressure to intensify again this week, with economists warning that the Bank of England could be forced to intervene if an inflation overshoot on Wednesday combines with weaker-than-expected growth data on Thursday.
“They’re not out of the danger zone,” Rupert Harrison, who was an aide and economic adviser to former chancellor George Osborne, told Bloomberg Television in an interview. “We’ve got UK inflation data tomorrow, which I think will be a key driver of gilt yields and markets very nervously watching, particularly services inflation.”
The formal purpose of Reeves’ address to Parliament was to update on her visit to China over the weekend, and she faced criticism from opposition MPs for going ahead with the trip given the turmoil on markets.
“The chancellor ducked the difficult questions by jetting off to Beijing,” said Mel Stride, the Conservative shadow chancellor. He likened Reeves’ tenure to Shakespeare’s Hamlet and said “to go or not to go, that is now a question.”
Reeves also faced questions from lawmakers on why she had restarted an economic dialog with China that had been suspended amid disagreements on human rights, Hong Kong, Covid and accusations of spying. She said she had raised a number of concerns about human rights including the case of jailed former media mogul Jimmy Lai, a British national.
“I think it is incredibly important that at every opportunity that we have we raise some of the difficult issues and challenge the Chinese authorities in a way that is appropriate and consistent with our British values,” she said.
Former Conservative leader Iain Duncan Smith also challenged Reeves on whether the government would allow any imports into Britain that had been made using slave labor. Reeves said the government was committed to working with international partners to ensure global supply chains are free from human and labor rights abuses.
--With assistance from Tom Rees, Philip Aldrick and Rachel Evans.
(Updates with further comment from Reeves starting in second paragraph.)
