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The Sun
06-07-2025
- Business
- The Sun
Millions of Britain's poorest pensioners to be hit by ‘stealth tax' as Government tries to plug hole in public finances
MILLIONS of pensioners face being hit by a "stealth tax" while the Government plans to plug the growing hole in public finances. Media reports suggest everyone on the full state pension could be forced to pay income tax as early as next year, even if they have no other income. 1 It means millions of people who have no other way to fund their retirement will start paying tax for the first time. This is because the personal allowance - the amount of income you can have before you start to pay tax - is stuck at £12,570 at least until 2028. Meanwhile the state pension, which is currently at £11,973 a year, is on track to go over that limit due to the triple lock system. Under the triple lock, the state pension increases by whichever is highest out of the rate of inflation, annual earnings growth or 2.5%. If average earnings continue to grow at their current rate of 5.2%, next year's state pension will rise above the income tax threshold for the first time. Therefore pensioners relying entirely on the state pension will need to pay the basic tax rate of 20% on any amount above the personal allowance limit. The exact figure they will need to pay will be confirmed later this year. The Mail on Sunday is reporting Chancellor Rachel Reeves is considering an extension of the freeze on the personal allowance rate. The Government is trying to plug an estimated £30billion gap in public finances - something that has become more difficult after it faced a bruising defeat this week in the Commons over its welfare reforms. Reeves had been trying to push through a bill that would see rules tighten on eligibility for Personal Independence Payments (PIP) and also freeze the level of payments for some Universal Credit claimants. Could you be eligible for Pension Credit? The controversial reforms were aimed at raising billions of pounds and encouraging more people to get back into work. But the bill was watered down after a rebellion by Labour MPs, which has left the Chancellor scrambling to find new ways to save. The Institute for Fiscal Studies (IFS) think tank estimates Reeves could raise up to £10billion a year by 2030 if she freezes the personal allowance bands for the next two years. The Chancellor has few options left without breaking Labour 's manifesto commitments, which include no increase in income tax, employee National Insurance contributions, VAT or corporation tax. It's worth noting that personal allowances were frozen by the previous Government for six years until 2028. Shadow Chancellor Sir Mel Stride The Mail on Sunday: "At the election last year the Conservatives promised to protect the state pension from being dragged into tax – Labour chose not to match that commitment. "They claim to be protecting pensioners through the triple lock, but this stealth tax will erode its value." How does the state pension work? AT the moment the current state pension is paid to both men and women from age 66 - but it's due to rise to 67 by 2028 and 68 by 2046. The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age. But not everyone gets the same amount, and you are awarded depending on your National Insurance record. For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings. The new state pension is based on people's National Insurance records. Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension. You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit. If you have gaps, you can top up your record by paying in voluntary National Insurance contributions. To get the old, full basic state pension, you will need 30 years of contributions or credits. You will need at least 10 years on your NI record to get any state pension.
Yahoo
05-07-2025
- Business
- Yahoo
The Weekend: When a government U-turn and a tearful chancellor rattled investors
It's been a tricky week for the UK government, and a turbulent week for financial markets as a result. Chancellor Rachel Reeves' much-touted welfare reform bill faced a huge rebellion from backbench Labour MPs and had to be heavily watered down to get over the line. Last minute-concessions by Keir Starmer's government – primarily the scuppering of plans to restrict eligibility for the so-called personal independence payments (PIP) – are likely to blow a hole in the £5bn a year the reforms were designed to save. It was enough to send gilt yields higher as investors questioned the government's grip on the public finances. Things got worse on Wednesday when Reeves appeared emotionally distraught in the House of Commons as an oblivious Starmer refused to explicitly back her. The yield on 10-year government bonds shot up by the most since the ill-fated Liz Truss minibudget in 2022. Claims that Reeves' tears were brought on by a "personal issue", and a belated insistence by the PM that she would remain in post for "a long time to come" finally brought some calm. There was another piece of legislation, described by its creator as "big and beautiful" making headlines during this tumult. Across the Atlantic, Donald Trump's hugely contentious tax cuts and spending bill was passed after a series of furious and often emotionally-wrought debates. "The golden age of America is upon us," Trump said at the White House Independence Day picnic after signing the bill into law. The president's former friend and aide Elon Musk was unequivocal in his critique of the bill's price and how it treats clean energy. He said in recent days that the $3.3 trillion increase in debt expected from the bill makes a "mockery" of his work at the Department of Government Efficiency (DOGE). Let's take a look at these and other stories stirring the markets in the last few days. Key investing trends in June, from defence stocks to Tesla's sales slump With geopolitical tensions dominating headlines, June's investing trends have strongly leaned towards defence and tech stocks. Fast-moving tariff news and the enduring conflict in the Middle East have been among the main market-moving topics during the month. Elsewhere, Tesla, (TSLA), bitcoin (BTC-USD) and gold (GC=F) assets were hot topics. Trump signs 'big beautiful bill' into law in White House ceremony The presiden't signature spending legislation moved through the Senate on a 50-50 tally that required vice president JD Vance to break the tie before the 870-page bill passed the House a few days later in a vote of 218-214. The process proved exceptionally controversial, mainly over healthcare provisions that are set to extract hundreds of billions in government savings but could cause millions of Americans to lose coverage. Trump seemed characteristically unmoved by such concerns, declaring: "It's going to be a period of time the likes of which I don't think this country has ever experienced before." How the government's benefits changes could affect your taxes The welfare reform bill faced strong opposition due to the harm it could cause to disabled people across Britain, as well as criticism that it was poorly designed in a scramble to find savings. For these reasons, the government was forced into a series of 11th-hour U-turns that ate into the targeted savings. Since departmental spending plans are now effectively locked in, and the government has already had to row back on planned cuts to pensioner benefits and working-age benefits, tax rises are looking increasingly likely. Bank of England asks Britons for banknote design ideas The UK's banknotes have featured towering historical figures since William Shakespeare first appeared on one 55 years ago. Not merely a means of payment, they "serve as a symbolic representation of our collective national identity and an opportunity to celebrate the UK,' says Victoria Cleland, the BoE's chief cashier. With this in mind, the central bank has launched a public consultation on the theme of its next series of notes, inviting UK residents and British citizens abroad to help shape the nation's currency for years to come. Entrants can either select one of six suggested themes, ranging from "architecture and landmarks" to "innovation" or decide to be, well, innovative, and go completely off piste. UK's best-selling cars revealed New car sales in the UK rose 6.7% year-on-year in June to 191,316 units, the best figures for the month since 2019. A quarter of all of June's sales, or 47,354, were electric. New petrol registrations fell 4.2% and diesel volumes gained only 0.2%, suggesting that combined share of the market was 51.6%. Total electrified vehicle registrations achieved a 48.5% market share. Tesla (TSLA), Kia, Volkswagen ( and Nissan (NISA.F) all featured in the top-10 bestsellers. But which models, and in what order? Read our story to find out. Ever fancied living by the sea? A modern apartment overlooking the bay, perhaps? Or how about a large, traditional home with easy access to the beach for your morning dip? Whatever your taste, it could be a costly move. Then again, it might not be as expensive as you think. It all comes down, of course, to location: Britain's priciest and most affordable seaside property hotspots With tax-free monthly prizes ranging from £25 to a eye-popping £1 million, premium bonds are a unique and popular choice of investment for British savers. Instead of an interest rate they have an annual prize rate, which will stand at 3.6% from August, when the draw is expected to deliver more than 6 million tax-free prizes worth over £396m. Find out more by clicking here: What are premium bonds and what are the odds of winning? Find more personal finance gems here Tariffs will be the main focus for investors in the coming week, with US president Donald Trump's deadline for the resumption of sweeping duties coming up on 9 July. But there are also a number of major companies due to report. Shell (SHEL.L) will kick off the week's company reporting, with the oil major due to update on its second quarter performance on Monday. Investors will be looking at TSMC's ( TSM) latest monthly sales figures, given the company is the world's largest contract chipmaker, helping to give a sense of demand in the sector. In the world of retail, investors will be keeping an eye on results from Levi Strauss (LEVI) to see how the jeans brand is navigating tariff uncertainty. Back in the UK, Vistry (VTY.L) will be in the spotlight, with investors hoping the housebuilder's troubles are behind it after issuing three profit warnings towards the end of last year. Given Jet2 (JET2.L) has already provided some guidance on performance for the year in a trading update, the focus will be on the travel company's outlook for the year ahead. Read more: Stocks to watch next week They're back. And if the first reviews are anything to go by, they're sounding as fresh as they were in their 90s heyday. I'm talking of course about Oasis, who took to the stage in Cardiff last night after a 16-year hiatus. They happen to be this old hack's favourite band, so it's a great excuse for me to put them in the spotlight. Here's one of their monster hits from debut album Definitely Maybe, performed during their iconic 1994 Glastonbury set. Enjoy!Errore nel recupero dei dati Effettua l'accesso per consultare il tuo portafoglio Errore nel recupero dei dati Errore nel recupero dei dati Errore nel recupero dei dati Errore nel recupero dei dati
Daily Mail
04-07-2025
- Business
- Daily Mail
Roller-coaster week sends UK yields higher
UK borrowing costs have seen their first weekly rise since May after a 'rollercoaster' ride sparked by growing fears about Labour's handling of the public finances. Ten-year borrowing costs shot close to 4.7 per cent on Wednesday after a tearful House of Commons appearance by Chancellor Rachel Reeves sparked doubts about her future. And though the moves in UK bonds – known as gilts – were mainly reversed in the following days as the Prime Minister backed Reeves, the episode added to worries sparked by the Government's humiliating climbdown on welfare reforms on Tuesday. Yields last night ended the week at 4.56 per cent, up from 4.5 per cent the previous Friday. It was the first weekly increase after a steady run of declines since mid-May. That partly reflected global moves as US bond yields turned higher thanks to worries about America's ballooning debt and trade tariffs. Nevertheless, it will pile further pressure on the beleaguered Chancellor as the increased borrowing costs will make it even harder to balance the books. Oliver Faizallah, head of fixed income research at wealth advisers Charles Stanley, said: 'This week's blowout was a reminder that the gilt market will not take kindly to excess borrowing.' Yields on UK ten-year bonds, known as gilts, began the week at around 4.5 per cent and eased close to 4.4 per cent ahead of the welfare vote in Parliament on Tuesday night – when it seemed Labour would manage largely to push through its plans. But last-minute concessions that helped the Government win the vote wiped out the intended savings. That blew a £5billion hole in the Chancellor's plans and sending yields racing towards 4.5 per cent the next day, before they climbed even further after Reeves' Commons appearance. It added to the damage to public finances caused by a previous U-turn on winter fuel payments, a deteriorating growth outlook and an increased commitment to defence spending. Andrew Goodwin, of Oxford Economics, said the volatility in gilts 'emphasises the need for fiscal discipline'. The sharp rise in yields reflected anxiety in the markets that, despite the Labour Chancellor's dismal economic record so far, her successor might prove even more of a worry by loosening the Government's commitment to balancing the books. Instead, ministers will need to try to find the missing billions elsewhere. Goodwin said: 'The experience will have demonstrated to the Government that markets will likely look unfavourably on any further loosening of the fiscal rules, increasing the chances that we see large tax rises in the Budget this autumn.'
Yahoo
03-07-2025
- Business
- Yahoo
Interest rates ‘can be slashed' if Reeves forced into tax raid
The Bank of England could cut interest rates more than markets expect if Rachel Reeves puts up taxes in the autumn, economists have said. The Chancellor is widely expected to announce tax rises at the next Budget after U-turns on welfare reforms and winter fuel payments left her needing to find £6.5bn of savings. Economists at Deutsche Bank have warned the Chancellor could face a £32bn black hole in the public finances later this year. Government borrowing costs surged on Wednesday after Ms Reeves made a tearful appearance in the Commons, which raised concerns that she could be replaced with someone less committed to the Government's borrowing rules. The bond market turmoil subsided after Sir Keir Starmer gave his backing to the Chancellor, who today underlined her commitment to fiscal rules in her first public appearance since her emotional outing at Prime Minister's Questions. The Chancellor said her adherence to the Government's borrowing and spending rules 'has meant that we can boost investment in the public services'. Economists have warned keeping to the fiscal rules will mean Ms Reeves will be forced to raise taxes in the autumn to keep within her fiscal rules, after the Government's U-turn on its welfare reforms indicated it is politically too difficult to cut spending. Kallum Pickering of stockbroker Peel Hunt said another round of tax increases by the Chancellor would mean the Bank of England 'could go even further with rate cuts than it currently indicates'. Money markets imply that there will be around three more rate cuts by the Bank by April next year, which would take the Bank Rate from 4.25pc to 3.5pc. Mr Pickering said: 'Tax hikes would depress demand and inflation. 'Assuming inflation is roughly back to target next year, the Bank of England should be able to offset any demand-slowing tax increases with easier monetary policy – from a Bank Rate of 4.25pc it has a lot of headroom to cut. 'This story should become clearer over time as the temporary energy-related inflation hump fades and if the Government is indeed forced to significantly raise taxes.' London's stock market and the pound recovered today, having taken a knock Wednesday on rumours that Rachel Reeves could leave her job. The FTSE 100 rose 0.6pc, while the FTSE 250 rose 1.2pc, according to preliminary numbers. Thanks for joining us on this live blog today. You can continue reading our commentary and news on business and the economy here. The cost of government borrowing remains higher than Tuesday, despite reassurance from Downing Street that Rachel Reeves will remain in office. The yield on 10-year gilts has dropped today to 4.547pc, having closed yesterday at 4.612pc. But on Tuesday, before the Government's about turn on welfare became fully apparent, gilts were at 4.454pc. Bruna Skarica, chief UK economist at Morgan Stanley, told Bloomberg: 'The combination of low growth and high debt interest cost implies difficult fiscal choices. 'The UK has a very short lifespan of its fiscal rules. Hence, market participants see this as a live risk.' The S&P 500 and the Nasdaq touched fresh record highs this afternoon after a stronger-than-expected jobs report pointed to a resilient labour market amid concerns about Donald Trump's tariff policies. Nvidia was trading at a record high, up as much as 2.4pc, and is nearing a $4 trillion (£2.9 trillion) valuation. Data showed non-farm payrolls increased by 147,000 jobs last month after a 144,000 advance in May. Unemployment fell to 4.1pc last month, against expectations of a rise to 4.3pc. 'We were all expecting the hard data would start to show some cracks, and we really haven't seen that with the jobs report coming in much better than expected,' said Brian Klimke, chief market strategist at Cetera Investment Management. 'That just puts the Fed on pause and gives it more time to wait right now because the labour market is really resilient.' Wall Street remained high this afternoon after encouraging new figures for the US services sector were released. Economic activity in the services sector grew last month after a single month of contraction, according to data from the Institute for Supply Management. The services purchasing managers index hit 50.8pc, above the 50pc break-even point for 11th time in the last 12 months. Thomas Ryan, of Capital Economics, said: 'The rebound in the ISM services index in June is broadly consistent with our view that economic growth will slow rather than collapse in the second half of the year.' Since Wall Street opened this afternoon, the Dow and Nasdaq have risen 0.9pc, while the S&P has gained 0.8pc, after jobs data was released earlier. Stock markets around the world are surging after the better than expected US jobs figures – and it has put one of Wall Street's tech darlings on course for a massive milestone. Semiconductor giant Nvidia is now less than $100bn away from becoming the first company in the world to have a $4 trillion market capitalisation. The Nasdaq Composite in New York was up 0.9pc while the S&P 500 and Dow Jones Industrial Average have gained 0.7pc, even though the US employment increase means a Federal Reserve interest rate cut has been all but ruled out for July. Wall Street's gains have lifted global markets, with the FTSE 100 up 0.5pc and the mid-cap FTSE 250 gaining 1.1pc. Left-wing Labour MPs will push up the cost of government borrowing, analysts have warned, amid fears they have 'increasing control' over public spending levels. UK gilt yields have staged a recovery today from the sharp surge on Wednesday, when traders were concerned that Rachel Reeves could be replaced with a chancellor less committed to her 'ironclad' fiscal rules. However, yields remain higher than they were before the government's U-turn on its benefits bill, which is expected to give the Chancellor a £5bn headache as she tries to balance the nation's books. Kathleen Brooks, research director at XTB, said a 'risk premium has been attached to UK bonds, which is likely to remain until the Autumn Budget'. She said: 'The premium this time is linked to Labour's left having increasing control over Kier Starmer and pushing him for ever greater levels of public spending. 'If the Government wants to avoid an embarrassing and devastating fiscal crisis, they need the guts to cut public spending to more reasonable levels. The bond vigilantes are circling, and Labour could be forced to U-turn on the U-turns.' The cost of borrowing in the US lurched higher after stronger than forecast jobs figures all but wiped out the chances of a cut to interest rates in July. The US 10-year Treasury yield rose six basis points to 4.33pc, the fastest rise for any major sovereign debt today. It also reduced some of the rally in UK gilts, which had been staging a recovery after the turmoil caused by Rachel Reeves's emotional appearance in the Commons on Wednesday. Some economists expressed surprise at how the jobs figures had been received by the market. Samuel Tombs of Pantheon Macroeconomics pointed to the fact most of the increase in US nonfarm payrolls was down to jumps in state government and health care employment: Wall Street jumped to fresh record highs at the opening bell after stronger than expected US jobs figures. The S&P 500 jumped 0.4pc to 6,254.49 while the tech heavy Nasdaq Composite rose 0.6pc to 20,514.88 after both closing at record highs on Wednesday. The Dow Jones Industrial Average rose 0.3pc to 44,623.11. The US economy added more jobs than expected amid rising state government and health care employment, official figures show. Employment in state government increased by 47,000 in June, largely in education, according to the Labor Department, while health care added 39,000 jobs. The White House tweeted 'trust in Trump' and hailed the 'Trump effect' as non-farm payrolls increased by 147,000 in June, well ahead of expectations of 106,000. Yet Bradley Saunders of Capital Economics said the data showed 'the increasing narrowness of the labour market's strength'. Market commentators appear unanimous that the stronger than expected US jobs figures have killed any chances of an interest rate cut by the Federal Reserve later this month. There has been no word yet from Donald Trump after the stronger than expected US jobs figures, which have weakened the case for the interest rate cuts he has been urging the Federal Reserve to deliver. The US president said on his Truth Social account on Wednesday that he wanted Fed chair Jerome Powell to quit, suggesting he was too late to cut interest rates. Lindsay James, a strategist at wealth manager Quilter, said: 'As has been a theme for some time now, the US economy continues to confound expectations, with the labour market adding 147,000 jobs in June, well above consensus expectations and recent averages. 'Furthermore, the unemployment rate fell to 4.1pc, suggesting that the US economy remains in robust shape.' He added: 'With the end of the 90-day pause in reciprocal tariffs ending next week, it was thought that the slowdown was under way. 'However, for now this seems to be far from the case. These job numbers will get far more attention than usual too because investors are watching for any sign that the labour market is beginning to weaken sufficiently to trigger an interest rate cut in July. 'Despite negative GDP growth in the first quarter and data suggesting the US is beginning to experience the pricing impacts of the tariff policy, this is yet to feed into the wider economy and the jobs market continues to grind away. 'Ultimately, this gives Jerome Powell and the Federal Reserve the cover it will want to hold rates at the next meeting.' UK borrowing costs rose after stronger than expected US employment figures forced traders to scrap bets on the Federal Reserve cutting interest rates this month. The yield on 10-year UK gilts – a benchmark for the cost of servicing Britain's national debt – spiked after US non-farm payrolls grew by 147,000 in June, well ahead of analyst forecasts for 106,000. Derivatives traders rapidly rearranged their positions to leave the chances of a Fed rate cut in July at just 5pc, compared to 25pc before the figures were published. While UK borrowing costs are still down on the day overall, the 10-year gilt yield climbed three basis points after the data to 4.56pc. The yield had stood at 4.45pc at the end of trading on Tuesday before concerns over Rachel Reeves's position sent them surging as high as 4.61pc. The US economy added more jobs than expected last month, official figures show, weakening the case for interest rate cuts despite concerns that Donald Trump's tariff onslaught could impact hiring. Non-farm payrolls grew by 147,000 in June, according to the Labor Department, up from an upwardly revised 144,000 in May. It was well ahead of economist expectations for just 106,000 jobs to be added to the economy. The unemployment rate fell from 4.2pc to 4.1pc while average annual earnings slipped from 3.9pc to 3.7pc. Mortgage demand from home buyers is expected to soften over the summer, according to a Bank of England survey of lenders amid warnings borrowers 'are finding it harder to repay'. Lenders reported that demand for mortgages for house purchase had increased in the past few months but was expected to decline over the three months to the end of August. Home buying costs became more expensive for some buyers from April, as stamp duty discounts became less generous. Stamp duty applies in England and Northern Ireland. It comes as the Bank of England is predicted on money markets to cut rates two more times before the end of the year. Ken James of broker Contractor Mortgage Services said: 'The figures are a sign that some borrowers are finding it harder to repay, even though we have seen a strong appetite to lend and credit becomes more available. 'While default rates remained stable, the share of money lenders fail to recover when a borrower default saw a slight increase. 'Lenders anticipate this will continue rising in the coming months, reflecting ongoing financial pressure on households. The fact that losses are expected to increase shows the pressure many households are under.' The pound remained steady in the wake of the turmoil caused by the brief uncertainty over Rachel Reeves's future. That could all change when the official US jobs figures are unveiled in less than an hour. The dollar remained close to three-and-a-half year lows against major currencies ahead of the non-farm payrolls numbers, which are expected to show the US economy added 106,000 jobs last month. A big miss could change the outlook for interest rates, as Donald Trump continues to pile pressure on policymakers at the Federal Reserve to cut borrowing costs. Sterling was up last up 0.1pc at $1.366, while the FTSE 100 was 0.5pc higher. On Wall Street, stock indexes were tentatively higher in premarket trading after the S&P 500 and Nasdaq closed at record highs on Wednesday. The Dow Jones Industrial Average, S&P 500 and Nasdaq 100 were all up 0.1pc ahead of the opening bell. Bond traders have said the turmoil in financial markets shows traders actually want Rachel Reeves to stay in post as chancellor. Mike Riddell, fixed income portfolio manager at Fidelity International, said: 'The conclusion from financial market price action yesterday afternoon is that the market actually likes Rachel Reeves. 'Of course it may not be about Reeves specifically, but the market pricing in uncertainty regarding a potential change in future policy. 'Ultimately, Reeves leaving might be bad news for UK borrowing costs if fiscal rules are changed or ditched, since it implies even bigger deficits and issuance. 'But that's not the only outcome. If the UK does get a new chancellor, it could be someone at least as fiscally conservative, so may not be bad news necessarily from a market perspective.' Sir Keir Starmer would trigger a fresh sell-off in the pound if he were to sack Rachel Reeves as chancellor, economists have warned. Diana Iovanel of Capital Economics said investors view Ms Reeves as 'fiscally prudent relative to potential alternatives'. She said the sharp sell-off in the pound and UK bonds on Wednesday was 'driven not by a loss of confidence in her but by speculation that she'll be replaced'. She said: 'All that suggests to us that if Reeves was replaced it would probably spark a renewed gilt-sterling selloff, rather than a recovery. 'It also suggests that, as long as the Chancellor retains her job, some of the recent risk premia in UK markets will probably continue to fade.' Rachel Reeves said her commitment to her fiscal rules would allow more investment as she has appeared in public for the first time since her tearful outing at Prime Minister's Questions. Borrowing costs fell today after Sir Keir Starmer gave his backing to the Chancellor following turmoil on bond markets caused by concerns that he could replace Ms Reeves with someone less committed to steadying the public finances. In a public show of unity, the Chancellor appeared alongside the Prime Minister and Health Secretary Wes Streeting at a health centre in London. The latter praised her setting aside £29bn for investment in the health service in her spending review. She said: 'I want to be clear, we are spending money on taxpayers' priorities, but that wouldn't have been possible without the measures that we took in the budget last year. 'We fixed the foundations and we've put our economy back on a strong footing. 'Our commitment to the fiscal rules has meant that we can boost investment in the public services.' She went on to say the Government was 'making this country fairer for those who have paid in all their lives by guaranteeing that the NHS will be there when they need it'. Ms Reeves added: 'This is the right way forward, good for the health of our nation and good for the health of our nation's finances. 'This Government will always deliver on the priorities of ordinary working people, and I am proud that with this plan the NHS will always be there for those who need it for the next 77 years, and many more beyond that too.' The UK bond market has become more sensitive to potential shocks as pension funds and the Bank of England have reduced their exposure to gilts, a broker has warned. Lower liquidity in markets tends to cause bigger swings in asset prices. Gilt yields - a measure of government borrowing costs – surged higher on Wednesday amid concerns that Rachel Reeves could be replaced as Chancellor with someone less likely to adhere to her fiscal rules. Darius McDermott, managing director at Chelsea Financial Services, said: 'It's fair to say the UK gilt market is more sensitive than US Treasuries, and there are structural reasons for that. 'The gilt market lacks the same depth and liquidity, and two of the largest historical buyers – pension funds and the Bank of England – have stepped back in recent years, leaving a gap in demand. Long-dated gilts, in particular, now look riskier given the UK's fiscal trajectory. 'That said, the US isn't immune either. Trump's climbdown on tariffs was a result of the bond market's reaction, not the equity markets. And, despite the rhetoric, Trump understands he cannot fire Powell even if it was within his power, as the market consequences would be severe. 'But in the UK, with a shallower market and limited long-term demand, any signal of political or fiscal uncertainty – especially around the Chancellor – gets amplified quickly. 'Investors are understandably cautious. More borrowing and higher inflation are real risks. With a relatively flat yield curve, it's no surprise many prefer to sit in shorter-dated debt for now.' Housebuilding stocks recovered on the FTSE 100 as the Prime Minister gave his backing to the Chancellor. Bond yields surged on Wednesday at the sharpest pace since April, hurting interest rate-sensitive sectors like homebuilders and real estate. Berkeley and Persimmon dropped 8pc and 6pc respectively on Wednesday. Housebuilders rose as much as 2.2pc today across the FTSE 100 and FTSE 250 as gilt yields – a measure of borrowing costs – fell back as Sir Keir Starmer insisted Rachel Reeves's job was safe. Vistry was the biggest gainer, up 3.2pc, with Bellway and Crest Nicholson up 2.1pc. Britain's dominant services sector has cut jobs for nine consecutive months, a closely watched survey showed, after the Chancellor raised taxes on employers. Private sector companies cut jobs at a faster pace than in May, according to the S&P Global UK Services PMI. However, the services industry grew overall at its fastest pace in 10 months despite shrinking export sales amid 'headwinds from US tariffs and geopolitical tensions'. Tim Moore, economics director at S&P Global, said: 'Concerns about elevated payroll costs meant that service providers were reluctant to turn on the hiring taps. 'Employment numbers decreased for the ninth month running and at a faster pace than in May, with job shedding again often attributed to redundancies as well as the non-replacement of voluntary leavers. He added: 'A combination of easing price pressures and lower employment leaves the door open for the Bank of England to resume its run of interest rate cuts at the next policy meeting in August.' The Bank of England could cut interest rates more than the market expects if Rachel Reeves puts up taxes in the autumn, economists have said. Kallum Pickering of stockbroker Peel Hunt said another round of tax increases would mean policymakers 'could go even further with rate cuts than it currently indicates'. Money markets imply that there will be around three more rate cuts by the Bank by April next year, which would take the Banks Rate from 4.25pc to 3.5pc. Mr Pickering said: 'Tax hikes would depress demand and inflation. 'Assuming inflation is roughly back to target next year, the Bank of England should be able to offset any demand-slowing tax increases with easier monetary policy – from a Bank Rate of 4.25pc it has a lot of headroom to cut. 'This story should become clearer over time as the temporary energy-related inflation hump fades and if the Government is indeed forced to significantly raise taxes.' UK borrowing costs will rise further as the U-turn on the benefits bill raises questions about the Government's ability to 'take hard decisions', bond investors have warned. Gilt yields – a benchmark for the cost of servicing the national debt – have recovered some ground today after Sir Keir Starmer gave his firm backing to Rachel Reeves. Borrowing costs had surged on Wednesday over concerns about the Chancellor's future. Mohit Kumar, chief Europe economist at Jefferies, warned that today's recovery was not expected to last. He said official estimates of UK growth were 'too optimistic' which would likely 'put a big fiscal hole in government finances'. He added: 'The latest u-turn on benefits bill has raised questions on the ability of the government to take hard decisions and bring down government spending. 'The other alternative is to raise taxes which looks like a distinct possibility on the upcoming budget. Problem is that tax raises hardly ever bring in the expected revenue and in many cases can be counterproductive.' He said he held a 'negative stance' on the outlook for gilts, adding he expected the Bank of England to cut interest rates at least twice this year and towards 3pc next year. Gilts have rallied further in early trading after the Prime Minister gave the Chancellor his backing. The 10-year yield – a benchmark for the cost of government borrowing – was down eight-basis points to 4.52pc, clawing back around half of surge on Wednesday. Longer-dated bonds had bigger moves, with the 30-year gilt yield down 10 basis points to 5.32pc. The pound has steadied after reassurances from Sir Keir Starmer over Rachel Reeves's future. Sterling was last up 0.1pc against the dollar at $1.366 as the Prime Minister told Virgin Radio the Government remains committed to the fiscal rules and economic stability. Darius McDermott, managing director at Chelsea Financial Services, said: 'Ironically, Rachel Reeves may have provoked her own 'Liz Truss moment'– not through policy excess, but through fears of what might follow her potential resignation.' He added: 'While Reeves' policies may be flawed, the real concern for investors is that her replacement could push the party further to the left at a time when markets are desperate for signs of credible fiscal leadership. 'Without a clear pivot towards tough decisions, the risk is this discomfort could spiral into a broader crisis of confidence in UK debt.' The cost of government borrowing dropped sharply at the start of bond market trading after Sir Keir Starmer committed to keeping Rachel Reeves as chancellor 'into the next election and for many years afterwards'. The yield on 10-year UK gilts – a benchmark for the cost of servicing the national debt – fell by six basis points to 4.55pc. However, the recovery was only partial, as borrowing costs remained higher than before the Chancellor's tearful appearance in the Commons on Wednesday. The 10-year yield surged 16 basis points higher after the Prime Minister initially failed to back her at the despatch box in one of the biggest moves since the mini-Budget crisis. Longer-term borrowing costs also eased, with the yield on 30-year gilts dropping by seven basis points to 5.35pc. The FTSE 100 jumped higher a day after questions over the Chancellor's future triggered turmoil in financial markets. The UK's flagship stock index climbed 0.4pc at the open to 8,812.05 a day after Rachel Reeves's tears in the Commons left it as the only major European index to lose ground. The mid-cap FTSE 250, which is more domestically-focused, also climbed 0.4pc to 21,534.56. On Wednesday it suffered its biggest daily decline since the Liberation Day turmoil in early April, dropping by 1.3pc. The slump in the pound despite surging borrowing costs was reminiscent of the Liz Truss-era meltdown in bond markets, analysts have said. The 10-year gilt yield – a benchmark for the cost of servicing the national debt – surged by nearly 16 basis points to 4.61pc on Wednesday, while 30-year yields climbed 19 basis points to 5.42pc. Deutsche Bank analyst Jim Reid said: 'Interestingly, the pound sterling slumped as well, which isn't what normally happens when longer-term interest rates are rising, as that should make the currency more attractive, other things equal. 'So that was reminiscent of the market patterns seen after Liz Truss, and the pound fell 0.8pc against the US dollar, making it the worst-performing G10 currency yesterday.' He added: 'Looking forward, the immediate issue is that the Government left a very narrow margin in March against their fiscal rules they set themselves. And since then, that margin has disappeared thanks to factors like the spending U-turns and the tariff announcements after Liberation Day. 'So 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. 'On tax, they've ruled out raising several large taxes like income tax and VAT, and the tax rises already announced generated unpopularity. On spending, they've come under intense pressure in response to the spending reductions so far, which have resulted in U-turns. 'And if they eased the fiscal rules, the fear would be a fresh market selloff like yesterday. So it's not obvious which way they turn.' Rachel Reeves's position as chancellor has been made more secure by the sharp reaction in bond markets to questions over her future. Will Walker-Arnott, a director at wealth manager Charles Stanley told BBC Radio 4's Today programme: 'This is a rare example of financial markets actually enhancing the career prospects of a politician. 'The markets were concerned that if the Chancellor goes then any fiscal discipline would follow her out the door and that would mean bigger deficits, more gilt issuance and so, obviously, gilt yields went up.' Investors will watch carefully what happens when trading opened on bond markets later after one of the worst performances since the Liz Truss mini-Budget crisis. Traders sold off UK gilts on Wednesday, sending the cost of government borrowing higher, amid concerns about the future of Chancellor Rachel Reeves. Christian Kopf, head of fixed income at asset manager Union Investment Group, told BBC Radio 4's Today programme: 'Often we see jitters in the bond market which is caused by external events but yesterday it was different. 'It was clearly caused by Prime Minister's Questions and by domestic events in the UK and the movement was very swift and very stark. 'It's about the future of the fiscal rule in the UK. Chancellor Reeves stands for that fiscal rule. Investors were growing concerned about the prospect of very high fiscal deficits that are no longer compliant with the fiscal rule and that would then give rise to higher yields and a weaker pound sterling. 'So people are really concerned about the consistency of economic policymaking in the UK.' Thanks for joining me. The value of the pound slipped further despite Sir Keir Starmer's assurances that Rachel Reeves will remain as Chancellor 'into the next election'. Sterling dropped nearly 1pc on Wednesday and government borrowing costs surged after the Chancellor shed tears in the Commons and the Prime Minister failed to back her when questioned at the depatch box. He later backed her but the pound and gilt yields – the return the government promises to buyers of its debt – failed to recover from one of the sharpest moves since the Liz Truss mini-Budget crisis. Mohamed El-Erian, chief economic adviser at Allianz, said: 'The concern in markets is that a new chancellor may not be as committed to the fiscal rules.' In early trading, the pound was last down around 0.1pc against the dollar at $1.364 and was 0.2pc lower versus the euro, which was worth 86.5p. Asked about Ms Reeves's emotional state on Wednesday, Sir Keir Starmer told the BBC: 'It was a personal matter for the Chancellor and I've been absolutely clear with you it has got nothing to do with politics, nothing to do with any discussion between me and Rachel, nothing to do with the matters of this week. 'She will be the Chancellor for a very long time to come. She is going to be the chancellor into the next election and for many years afterwards.' Here is what you need to know: Borrowing costs surge on speculation over Reeves's future | UK gilt yields soar as pound plunges after Prime Minister fails to back his Chancellor in Parliament Cash Isa raid 'will drive up mortgage costs' | Building societies warn over ability to raise funds for loans as Reeves's plans to cut tax-free threshold Microsoft to cut 9,000 jobs as chatbots take over | Tech giant sheds 4pc of workforce as executives order staff to hand tasks to AI Tesla sales hit three-year low as Musk feuds with Trump | Billionaire criticised president's bill that cuts incentives for electric cars Kathryn Porter: The Heathrow fire report is not just damning for National Grid | The regulator should be monitoring standards, not just issuing fines after things go wrong Asian shares were subdued as investors braced for a key US jobs report and waited on the passage of Donald Trump's tax cutting bill in Congress. Wall Street climbed overnight to close at new record highs after President Donald Trump announced that the US has struck a trade deal with Vietnam, including a 20pc tariff on exports to America. That is lower than the 46pc tariff that had been threatened, but still much higher than previous rates. Vietnamese shares gained 0.5pc to the highest since April 2022. The local dong currency, however, dipped to a record low of 26,229 per dollar. Japan's talks with the US struggled, while South Korea President Lee Jae Myung said tariff negotiations were looking difficult and he cannot say if talks can conclude by next Tuesday. Tokyo's Nikkei 225 inched up 0.1pc to 39,794.16. In South Korea, the Kospi added 1pc to 3,106.46, while Australia's S&P/ASX 200 was down 0.1pc to 8,589.30. The Hong Kong's Hang Seng index lost 1pc to 23,976.41. The Shanghai Composite index edged up 0.1pc to 3,57.36 as data showed China's services activity expanded at the slowest pace in nine months in June. On Wall Street, the Dow Jones Industrial Average closed flat, at 44,484.42, the S&P 500 rose 0.5pc, finishing at 6,227.42, and the Nasdaq rose 0.9pc, to 20,393.13. In the bond market, the yield on benchmark 10-year US Treasury notes rose to 4.284pc from 4.251pc on Tuesday night. Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.
Yahoo
02-07-2025
- Business
- Yahoo
Reeves' five choices to turn government finances around
Chancellor Rachel Reeves' plan to cut billions of pounds in welfare costs through reforms has essentially gone up in smoke. Following major government concessions on the benefits bill, a forecast £5bn in savings by 2029-30 has been severely dented. Coming so closely after the U-turn on the Winter Fuel Allowance, the government has almost eliminated its £10bn buffer which it wanted to keep the public finances on track. So what are Reeves' choices now? As the Autumn Budget approaches, she has five options to change the financial situation. The government could decide to wait and see if the UK economy grows by more than expected and debt interest costs fall. That is a risky move. Part of the reason why Reeves announced the welfare reforms in March's Spring Statement was because higher debt interest payments and weaker tax receipts had more than wiped out her existing £10bn buffer. Meanwhile, the Office for Budget Responsibility, an independent body which assesses the government's spending plans and performance, halved its forecast for UK economic growth this year to 1%. At that point, there was still great uncertainty over the impact of Donald Trump's US tariffs. Since then, the UK became the first country to strike a deal with Trump. It has significantly reduced tariffs on areas such as cars, though a 10% tax still applies in some areas and a final agreement on UK steel shipments to the States has yet to be reached. Reeves has literally just announced a Spending Review. The big winners were the NHS, getting an extra £30bn a year, as well as defence. Other departments fared less well or saw cuts. Going back in and asking ministers to find more savings after just being handed their budgets would not only be disruptive but would make the government look like it is scrambling to regain credibility. There is also a big question mark now over whether the government can afford to remove the two-child benefit cap. Sir Keir Starmer said last month he would "look at" scrapping it, at a cost of £3.5bn. This is a big no-no for Reeves. When she became chancellor, Reeves set out two financial rules. The first was that day-to-day spending would be paid for with government revenue, which is mainly taxes. Borrowing is only for investment. The second is that debt must be falling as a share of national income by the end of a five-year period. Reeves has repeatedly said these rules are "non-negotiable". They are aimed at showing that the UK is financially stable after the country's credibility was shaken by former Prime Minister Liz Truss's mini-budget in 2022. Theoretically, Reeves could alter the rules - they are self-imposed - but that risks rattling markets and if that happens, debt interest payments could rise. The OBR produces two assessments of the UK's economic and financial outlook a year, coinciding with the Autumn Budget and the Spring Statement. The International Monetary Fund (IMF) has suggested that the OBR report should be limited to just once, at the Budget. The IMF reckons one assessment would "promote further policy stability" and potentially reduce the pressure on the government's buffer figure, which is often referred to as "headroom". It said that even "small revisions to the economic outlook can erode the headroom within the rules, which is the subject of intense market and media scrutiny". Prior to the mini-Budget, Truss and her Chancellor Kwasi Kwarteng shunned the OBR when they announced £45bn in unfunded tax cuts, which unnerved financial markets. Since then, Reeves has introduced a new law which means that any government announcement that makes major changes to taxes or spending is subject to an assessment by the OBR. To limit a report to once a year, she could choose to limit what she sets out in the Spring Statement to just providing an update on the state of the economy. Labour has pledged not raise taxes for "working people", ruling out increases to employee National Insurance Contributions, Income Tax and VAT. On Wednesday, cabinet minister Pat McFadden said the government would stick to that promise but he admitted that there would be "financial consequences" to the decision to water down planned welfare cuts. That leaves Reeves with few levers to pull to replenish the government's coffers. One option is to keep a freeze on tax thresholds in place for longer. The policy, introduced under the Tory government, was due to end in April 2028. If Reeves extended it until the end of the parliament, it could bring in nearly £7bn. In reality, this is a tax rise on working people - if your pay rises, you risk being dragged into a higher tax threshold. However, it would be a big fix for a government in desperate need of one. No 10 backs Reeves after tearful Commons appearance Labour won't break tax pledges after welfare climbdown, minister says Spending Review: who are the winners and losers? Sign in to access your portfolio
