Latest news with #fiscalcrisis
Telegraph
03-07-2025
- Business
- Telegraph
Reeves has destroyed her fiscal headroom and will now bring ruin on Britain
Perhaps it should be known as the 'teardrop premium'? Re-wind three years to the fiscal crisis triggered by Liz Truss's mini-budget, and the term 'moron premium' became popular among City traders. It described how Britain had to pay a bit extra on its borrowings to allow for the fact that the country was run by people who appeared completely crazy. Now the markets are charging more to lend money to a nation whose finances are run by a woman who cries in Parliament. It might be fair or unfair. That does not matter very much. What is absolutely clear is this: with her tearful performance, the Chancellor Rachel Reeves has destroyed her fiscal headroom, and will now bring ruin on the UK. We will probably have to wait for her memoirs – which given her taste for tweaking her CV might be titled something like 'How I Became Britain's Greatest Ever Chancellor And Saved The World' – to find out the real story behind yesterday's extraordinary scenes in Parliament. It might have been a personal issue. It could have been a furious row with the Speaker. Or it might have been existential despair at the state of the public finances, and the prospect of breaking all her promises not to raise taxes again in the Budget next autumn. In the end, it does not matter very much. It is the consequences that matter. And it is already obvious that she has wiped out what little remained of her fiscal headroom. The sight of Reeves crying in Parliament dramatically illustrated two points. First, the woman who described herself as the 'Iron Chancellor' has now lost control not only of her own emotions, but more importantly of the nation's finances. The option of controlling spending no longer exists because her backbenchers won't tolerate it. Next, the 'fiscal rules' she invested so much political credibility in sticking to have now been shredded. The result? Borrowing costs have already been pushed sharply higher, and are likely to rise even further over the course of what looks set to prove a treacherous summer for the British economy. Gilt yields spiked up yesterday, rising 16 basis points in the space of a few hours, and while they moderated slightly this morning (Thursday) they will stay high so long as Reeves clings on to office. In her first Budget, Reeves recklessly gambled with the nation's finances. By leaving herself a mere £10 billion of 'fiscal headroom' she placed a massive bet that 'stability' would unlock a wave of investment; that money 'invested' in GB Energy and a National Wealth Fund would generate quick returns; that the non-doms would cheerfully pay tax on their global earnings instead of catching the first flight to Dubai; and that business would absorb the extra tax she was forcing them to pay, and sign up for an 'industrial partnership' that would reboot growth. None of it has worked. The blunt truth is this: Britain will be paying the 'teardrop premium' for as long as Reeves clings desperately to office. The debt will keep mounting, and even worse, the amount we have to pay to service all that borrowing will keep on going up as well. She promised to make the UK the fastest-growing economy in the G7. Instead, she has taken the country to the brink of economic collapse. It will get very messy. And it is too late for Reeves to do anything to avoid it now – her credibility has already been destroyed.
The Guardian
02-07-2025
- Business
- The Guardian
UK bond yields rise sharply amid speculation over future of Rachel Reeves
UK government borrowing costs have risen sharply amid speculation over Rachel Reeves's position as chancellor, as City investors warned Labour's welfare U-turn had blown a multibillion-pound hole in the public finances. After Keir Starmer failed initially to give his full backing to a tearful chancellor at prime minister's questions on Wednesday, the yield on 10-year UK government bonds had its biggest jump in a day since Liz Truss was in No 10, while the pound slumped. The yield – in effect the interest rate – rose by as much as 0.2 percentage points to trade close to 4.7%, climbing by the most in one day since October 2022 when investor confidence in Britain remained shaken after Truss's mini budget. Highlighting investor unease over the government's tax and spending plans, the pound also fell by more than 1% against the US dollar. Downing Street later insisted that Reeves would remain in her post and had not offered her resignation after a major rebellion by Labour MPs forced the government to withdraw a planned £5.5bn cut to disability benefits. However, investors warned the backtracking, which follows an earlier U-turn on winter-fuel payments for pensioners costing £1.25bn, put Reeves in danger of smashing her self-imposed fiscal rules without sweeping tax rises. 'A fiscal crisis now appears to be on the horizon unless tough decisions (such as tax rises) are enacted. Markets will be on high alert over the next months,' said Neil Mehta, a hedge fund manager at RBC BlueBay Asset Management. 'Last night's parliamentary chaos underscores the government's waning control over public spending. Reeves's October budget has already increased 2025-26 public spending by nearly £100bn compared to the previous government's plans, leading to higher borrowing and worsening inflation.' Reeves has repeatedly pledged to stick to her 'iron-clad' fiscal rules – which require day-to-day spending to be matched by receipts within five years – despite mounting spending pressures and rising debt interest costs. Having committed against further large tax rises after the autumn budget, the chancellor turned to welfare savings in her spring statement to rebuild the headroom against her primary target to £9.9bn after a deterioration in the outlook for the government finances. However, the threat of a backbench Labour rebellion and rise of Nigel Farage's populist Reform UK in the opinion polls has led the government to reverse some of its planned cuts, leading to questions over Reeves's authority. 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 Investors warned that Starmer swapping his chancellor and adopting a looser approach to the public finances would probably be poorly received in financial markets, while economists said that tax rises at the autumn budget could be required to rebuild confidence. Kathleen Brooks, research director at trading platform XTB, suggested the rise in bond yields was linked to speculation over Reeves's position during PMQs. 'The PM might be keeping his options open at this stage, but the chancellor is a strange choice to axe from a market perspective.' Benjamin Caswell, a senior economist at the National Institute of Economic and Social Research, said the relatively limited headroom the chancellor had left against her fiscal rules had created problems as the economic outlook turned. 'Once you've established the rule the most important thing is to set yourself credibility against it. If you're having to change course and tinker and make piecemeal ad-hoc adjustments every six months that doesn't convey credibility,' he said. 'There should be serious consideration of raising one of the big three taxes [VAT, income tax, and national insurance] in the autumn budget.'
Reuters
31-05-2025
- Business
- Reuters
High yields bring US fiscal 'precipice' even closer
ORLANDO, Florida, May 29 (Reuters) - Few would disagree that U.S. public finances are deteriorating, but debt Cassandras have been warning of a fiscal day of reckoning for 40 years and it has yet to arrive, so why should this time be any different? The non-partisan Congressional Budget Office's baseline forecast sees federal debt held by the public rising to 117% of GDP over the next decade from 98% last year, and net interest payments rising to 4% of GDP, a sixth of all federal spending. While these eye-watering figures are concerning, it still seems difficult to fathom the United States experiencing a genuine debt crisis where investors turn their backs on Treasuries and the dollar, the two cornerstones of the global financial system. Both should enjoy strong demand – at least for the foreseeable future – even if their prices may need to fall to attract buyers. And in times of extreme crisis, like 2008 and 2020, the Fed can always buy huge quantities of U.S. bonds to stabilize the market. But that doesn't mean investors should ignore the swelling tide of fiscal gloom. We may not see a full-blown debt crisis, but there's a sense that "the fiscal" matters for markets more now than it has for decades. To better understand the risk at hand, it's useful to explore the assumptions baked into the current U.S. debt and deficit projections. The CBO's comprehensive fiscal projections are a benchmark for many policymakers and investors. But amid the fog of uncertainty created by U.S. President Donald Trump's trade war, the baseline economic assumptions underlying this outlook may be too optimistic. The CBO assumes that the United States will experience continuous, uninterrupted economic growth over the next decade. While it's true that since 1990 the U.S. economy has twice gone on streaks of more than a decade without experiencing a recession, conditions today - not the least of which is the country's bloated public debt burden - suggest that a repeat is highly unlikely. And in the event of a downturn, U.S. public finances would almost certainly suffer the double whammy of shrinking tax receipts and a surge in benefit payments, pushing the country closer to a fiscal cliff. Of course, an economic downturn would probably also prompt the Fed to lower interest rates, which would likely cause bond yields to fall and offer some relief on debt-servicing costs. But investor angst over the debt may keep market-based borrowing costs higher than they would otherwise be, something that is also not baked into the CBO's central projections. And if government borrowing costs over the next decade are higher than currently projected, the U.S. fiscal picture is even more troublesome than thought. Yield curve assumptions play a major – and often underappreciated – role in U.S. debt sustainability projections. The current CBO projections are based on the expectation that the yield curve will "normalize" in the coming year. They assume that the three-month Treasury yield will fall to 3.2% and the 10-year yield will settle at 3.9%. But what if the yield curve stays near current levels over the next decade, with a three-month rate of 4.40% and a 10-year yield of 4.50%? Chris Marsh at Exante Data crunches the numbers and finds that, in this scenario, federal debt held by the public could rise to 125% of GDP by 2034 and interest payments as a share of revenue would approach 30%. Interest payments as a share of revenues are already about to exceed their late-1980s peak and may end up at the highest level since at least the 1950s. Adding to this concern, Saul Eslake and John Llewellyn at Independent Economics note that if the yield curve does not normalize, the United States could get in the dangerous position where nominal GDP growth remains persistently below the 10-year Treasury yield, meaning debt dynamics would deteriorate because interest payments would outstrip growth. Given that the Trump administration's current budget bill is expected to add nearly $4 trillion to the federal debt over the next decade, the risk of this is especially pertinent today. One consequence of higher-for-longer U.S. interest rates then could be a much-heavier-for-much-longer debt burden. (The opinions expressed here are those of the author, a columnist for Reuters)
Fox News
19-05-2025
- Business
- Fox News
Former Freedom Caucus Chair Bob Good calls out 'the big glaring weakness for all of Republican government'
Print Close By Alex Nitzberg Published May 19, 2025 Former Rep. Bob Good, a Republican from Virginia who once chaired the conservative House Freedom Caucus, is sounding the alarm about America's "fiscal crisis," accusing fellow Republicans of failing to focus on the critical issue and slash spending. He blamed "all Republican leadership," during an interview with Fox News Digital. "You're not hearing a lot from Republican leadership — from the White House or from the Congress — about spending cuts," he said. Good praised President Donald Trump on a variety of issues, crediting the president with doing a "great job in many executive actions," but he described the moves as "quick fix sugar highs" that could easily be undone when a Democrat wins the presidency again and said that Congress has not been codifying Trump's policies into law. He said that "the big glaring weakness for all of Republican government" is failing to focus on the nation's debt and deficit, and slashing spending. TRUMP'S 'BIG, BEAUTIFUL BILL' PASSES KEY HOUSE HURDLE AFTER GOP REBEL MUTINY The U.S. national debt is over $36.2 trillion, according to President Trump and some GOP lawmakers have been seeking to push Trump's "One, Big, Beautiful Bill" through Congress, but other Republicans have been pressing for changes. The House Freedom Caucus issued a statement on Sunday night declaring that the measure "does not yet meet the moment." "As written, the bill continues increased deficits in the near term with possible savings years down the road that may never materialize. Thanks to discussions over the weekend, the bill will be closer to the budget resolution framework we agreed upon in the House in April, but it fails to actually honor our promise to significantly correct the spending trajectory of the federal government and lead our nation towards a balanced budget," the caucus board's statement reads, in part, later adding, "We face a serious fiscal crisis, and we must put an end to Washington's wasteful spending now." TRUMP'S 'BIG, BEAUTIFUL BILL' WINS SUPPORT FROM POLICE FOR OVERTIME TAX ELIMINATION Good, a fiscal hawk who has been referring to the measure as the "big, ugly bill," indicated that if Republicans do not fight now when they only need 51 votes to pass a measure in the Senate due to reconciliation, they will not do so later. He said most GOP figures, like most Democrats, are largely focused on their own political careers and will "be even weaker" in 2026, the year of the midterm elections. Office of Management and Budget Director Russ Vought has pushed back against criticism of the reconciliation bill. "Critics have attacked the House's One Big Beautiful reconciliation bill on fiscal grounds, but I think they are profoundly wrong," he wrote in a part of a post on X last week. "The current House bill includes $1.6 trillion in savings. These are not gimmicks but real reforms that lower spending and improve the programs." "So after nothing happening for decades, the House bill provides a historic $1.6 trillion in mandatory a three-seat majority. $36 trillion in debt is not solved overnight. It is solved by advancing and securing victories at a scale that over time, gives a fighting shot to addressing the problem. The House's One Big Beautiful Bill deserves passage for many reasons ... tax cuts, border security funding, eliminating the Green New Deal, work requirements to end dependency ... but it should not be lost on anyone, the degree to which it ends decades of fiscal futility and gets us winning again. It deserves the vote of every member of Congress," he asserted. 'TOO LATE': TRUMP BACKS CHALLENGER TO FREEDOM CAUCUS CHAIR DESPITE RECEIVING PRIOR ENDORSEMENT Good, who served in Congress from early 2021 until early 2025, lost a 2024 congressional GOP primary contest to a Trump-backed challenger. Trump repeatedly attacked Good in the lead up to the 2024 primary contest, asserting on Truth Social that "Bob Good is BAD FOR VIRGINIA, AND BAD FOR THE USA." Good ultimately lost the primary by less than 1% of the vote. He had endorsed Florida Gov. Ron DeSantis for president in 2023 before the governor launched his White House bid that year. In 2024, Good endorsed Trump immediately after DeSantis dropped out. CLICK HERE TO GET THE FOX NEWS APP In his endorsement post, Good called Trump "the greatest President of my lifetime," adding, "we need him to reinstate the policies that were working so well for America." Good expressed interest in the prospect of potentially running for office again, telling Fox News Digital that he is keeping his "options open" and praying about it, but has not arrived at a decision yet. Print Close URL
Bloomberg
19-05-2025
- Business
- Bloomberg
Dollar ‘Fiscal Frown' Theory Has Deutsche Bank Warning of Losses
The dollar is at risk of losses whether the US government lands in a fiscal crisis or a recession, according to George Saravelos, Deutsche Bank's global head of FX strategy. 'A dollar fiscal frown is the best way to picture things,' Saravelos wrote in a note on Monday, riffing off the so-called ' dollar smile ' framework Stephen Jen put forward more than two decades ago. Upcoming budget negotiations will determine where the dollar lands on that curve.
