Latest news with #PublicFinances
The Guardian
03-07-2025
- Business
- The Guardian
UK government bond markets rally after Starmer backs Reeves
UK government bond markets have rallied after Keir Starmer backed Rachel Reeves to remain as chancellor for 'a very long time' despite lingering investor concerns over a multibillion-pound hole in Britain's public finances. The yield – in effect the interest rate – on British government bonds, also known as gilts, fell by about 0.1 percentage points on Thursday morning to trade close to 4.5%, reversing a sharp rise on Wednesday sparked by feverish speculation over Reeves's future. The pound rose against other leading currencies, while a closely watched business survey showed that Britain's dominant service sector recorded its fastest rate of growth in 10 months. After Starmer had failed initially to give his full backing to a tearful Reeves at prime minister's questions, he used a BBC interview late on Wednesday to publicly express his support for the chancellor and denied suggestions she was upset by the fallout over the government's welfare bill. However, investors warned that a climbdown over the bill and the backtracking on cuts to winter fuel payments for most pensioners had left a large hole in the public finances that would need addressing at the autumn budget. After Thursday morning's recovery in the bond markets, Neil Wilson, the UK investor strategist at Saxo Bank, said: 'The calculation was that [Reeve's] probably the most market-friendly chancellor Labour could field, so replacing her indicated a higher chance of changing fiscal rules, implying more debt and instability. 'But there is a deeper problem for the government here even if she stays – the market is getting nervous about its ability to make the sums add up whether she is 'market-friendly' or not and the economic outlook is hardly improving.' A broad rebellion by Labour backbench MPs forced ministers to withdraw a planned £5.5bn cut to disability benefits this week, on top of earlier concessions on winter fuel payments worth £1.25bn. Reeves has repeatedly promised to stick to her 'iron-clad' fiscal rules, which require day-to-day spending to be matched by receipts within five years. This is despite mounting spending pressures and rising debt interest costs. Having committed not to make further large tax increases after last autumn's budget, the chancellor turned to welfare savings in her spring statement to rebuild the £9.9bn of headroom against the government's main fiscal target after a deterioration in the outlook for the government finances. Economists said Reeves could break her fiscal rules unless corrective action was taken at the autumn budget. Meanwhile the is speculation that the financial hit from Labour's U-turns could be further complicated by a cut to the growth forecasts of Office for Budget Responsibility, the Treasury watchdog. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion But in a potential boost for the chancellor, the latest snapshot from the S&P Global UK Services PMI, a closely watched business survey, showed a sharp rise in private sector activity buoyed by improving business and consumer spending. Yet concerns remain over the impact from lingering inflationary pressures, Labour's tax increases introduced in April and the end of Donald Trump's 90-day pause in his US tariff plans on 9 July. Economists said tax increases would probably be required given the challenges Labour has faced in cutting spending, and warned that ditching the fiscal rules to allow more borrowing could provoke a sharp reaction in bond markets. Jim Reid, the head of macro and thematic research at Deutsche Bank, said: 'For markets, the logic is that Reeves has been a big defender of the fiscal rules, and there've been growing calls for these rules to be eased and for borrowing to go up. So the concern in bond markets is that a new chancellor might trigger a fresh wave of borrowing that pushes rates up further. 'Unless we got a big burst of growth before the budget, then the government would need to announce further tax rises or spending cuts if they still want to meet the fiscal rules. So this leaves them in a tricky position.'
Telegraph
13-06-2025
- Business
- Telegraph
Britain will regret abandoning the North Sea now Israel has attacked Iran
Dozens of air strikes have been launched against nuclear sites in Iran. Retaliation has already begun against Israel. And the oil price has spiked sharply upwards as the Middle East once again edges closer to the brink of a major conflict. We will see how the crisis unfolds over the next few days and whether it is resolved or escalates into a full-scale conflict. One point is surely clear, however. With the energy market in chaos, the short-sighted folly of Britain running down its own energy resources in the North Sea will be painfully exposed – and the fragility of our public finances will be clearer than ever. No one yet knows what will happen in the Middle East. Israel has already launched attacks on Iranian nuclear facilities, designed to stop its major regional adversary from developing its own nuclear weapons. Iran has responded with drone strikes against Israel. The situation remains tense. As we might expect, the oil price has already spiked upwards. Brent crude initially rose by 12pc and was settling 6pc higher on Friday, while West Texas Intermediate, the American benchmark, was up by 6pc in early trading. Sure, oil was cheap by historical standards, but those are still major increases. We are a long way from the $120 a barrel seen at the start of the Ukraine war, but if the conflict escalates we may very quickly get back to those kinds of prices. Against that backdrop, you might think the UK would be grateful that we had plenty of domestically produced oil and gas to fall back on. After all, the Middle East sea lanes may soon be disrupted, cutting off crucial trade routes that keep the UK supplied with oil, petrol and electricity. Yet as Simon French, the Panmure Liberum economist, pointed out on X: 'If Iran retaliates by disrupting the Strait of Hormuz it will bring into sharp relief for the UK the folly of not maximising its domestic gas supply from the North Sea.' That is surely true. The UK has been rapidly running down what are still abundant energy resources in the North Sea in a pig-headed pursuit of global leadership on climate change. According to the industry association Offshore Energies UK, output from the North Sea has averaged a 9pc annual decline since 2020. We all know the reasons for that. The Government has failed to licence new fields and, even where they have been approved, the courts have sided with climate change activists in using existing legislation – which could easily be amended if Parliament wished to do so – to block even those developments that have been approved. Meanwhile, windfall taxes have been pushed up to record levels and threaten to go even higher, making investment very unattractive even if the Government does permit it. Put those two factors together and it is hardly surprising that output from what was once one of the UK's major industries is in steep decline. It was of course always, to put it politely, a little unclear why it was better for the environment to burn Qatari or American instead of British gas. It costs jobs, tax revenues and it makes the trade deficit even worse than it already is. Still, all those points aside, it is the threat to the security of supply that is really critical. If the shipping lanes in the Middle East get closed down, as they well might over the next few days, supplies will dry up and the UK, which relies on imports for more than 40pc of its energy consumption, will be left very exposed. In a crisis, it would be good to have your own energy. But even though there is still plenty of gas underneath the sea bed, we have thrown away the capacity to extract it. It gets worse. The UK is also in a perilous position financially. With Rachel Reeves, the Chancellor, confirming yet more huge rises in spending only this week, the deficit is soaring out of control. The economy has stagnated and taxes have already been pushed up to levels where little more can be squeezed out of an economy where entrepreneurs are already feeling stung and where companies are shifting bases abroad. The deficit is already forecast at more than 5pc of GDP for this year, and the state is already set to consume 44pc of output, and that is if everything goes to plan. And yet if oil prices spike upwards, the Government will have to find more money to pay for its own energy bills, and will be pressured into funding a bail-out for businesses and households, just as it did after the Ukraine crisis. It might be largely forgotten now, amid the chorus of complaints from Labour ministers about how Liz Truss crashed the economy, but it was actually the spike upwards in energy prices and the subsidies demanded in response that triggered the sterling and gilt market crisis in 2022 far more than the modest tax changes in the mini-Budget of that year. If oil goes above $100 a barrel and drags the price of gas up with it, we will be right back in the same position, except that the UK's finances are now in significantly worse shape than they were three years ago. The blunt reality is this. It was always criminally reckless to run down the UK's domestic reserves of oil and gas, at least until we had wind, solar and nuclear power that was cheap, plentiful and reliable. It destroyed jobs, eroded the tax base and, most critically of all, left the UK exposed to the volatility of the international energy markets instead of allowing us to rely on our own domestic resources. We all hope the latest crisis in the Middle East is quickly resolved and peace restored. But if it isn't, the huge strategic error the UK has made by running down the North Sea will be painfully exposed – and we will all pay a very high price for the idiocy of a policy establishment that allowed it to happen.
