Labour intensifies push for growth to avoid ‘disastrous’ tax rises

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The UK government is pushing for fresh growth initiatives to avoid a “catastrophic” tax hike after a punishing week for markets that threatens to derail its policy agenda.

UK borrowing costs hit a near 16-year high on Friday, closing Worst week in a year That followed a sell-off for gilt markets that dragged down the pound and pressured the government to reassure investors on the state of public finances.

When Rachel Reeves returns from a visit to China on Monday, the chancellor plans to set out a credible “growth narrative” with new economic policies, including a set-piece speech expected later this month, according to officials.

Officials said the government was determined to avoid further tax rises on top of the £40bn package set in October, saying “it would be completely disastrous”.

Instead, the government is seeking growth and reining in public spending A detrimental increase in the cost of government borrowing.

Officials and ministers are bracing for possible cuts to departmental spending plans in the upcoming spending review, which will take place on June 11, according to people familiar with the process.

As part of its pro-growth agenda, Labor plans to change the “right-round” process by which different departments agree on collective policy-making.

“Departments will be asked whether the policy will have a beneficial impact on growth and if the answer is yes, we will do it – as a broad policy,” a Treasury official said.

At the same time, the spending review process will also send a strong message to departments that if they are pushing policies that are a “drag on growth,” they will have to “re-examine” them.

But economists warned that the gilt market sell-off exposed serious weaknesses in the party’s strategy for the economy and public finances, criticizing the government for failing to create enough margin for adverse changes in October’s budget and for being slow to detail. Growth initiatives.

“They now need to show they are serious about tackling the UK’s fiscal challenges in a high-rate world,” said Ben Navarro, UK economist at Citigroup. “This means grappling with structurally weak growth. But they may be misguided if they think that only growth can get them out of this financial hole. Some expenditure and tax adjustments are also required.”

The Bank of England said the economy failed to pick up growth in the last quarter of 2024, after a weaker-than-expected GDP reading late last year. A business survey revealed a loss of confidence after the tax hike in the October Budget.

The 10-year gilt yield ended the week at 4.85 percent, up 0.25 percentage points from a week ago, when Sterling fell as low as $1.219This is its weakest level against the dollar since November 2023 Shares in the domestically-focused FTSE 250 index fell 4 percent this week, the biggest decline since June 2023.

Reeves’ October budget, which included a sharp increase in borrowing, has been the subject of a sharp sell-off in global bond markets due to renewed fears over inflation.

That has dragged down government bond yields across the board as investors bet that central banks will be slow to cut interest rates. That has mixed with investor concerns about the UK economy as the country’s 30-year borrowing costs hit their highest this century.

“The higher yields rise, the worse financial conditions are,” said Mark Dowding, chief investment officer of fixed income at RBC Bluebay Asset Management.

Strong US jobs numbers Adding to the pressure on bond markets on Friday, interest rate cuts from the Federal Reserve prompted traders to bet on an even slower pace. The next key moment for gilts will be UK inflation figures next week.

One area where Reeves will push for major reforms is laying out new details for a new “Planning and Infrastructure Bill” which should be introduced to the House of Commons in March and aims to speed up development.

A senior Labor MP said: “The Government desperately needs to bring forward a growth plan … and this is more important than ever for businesses facing higher National Insurance, a new package of employment rights and a higher minimum wage.”

Another Labor veteran said recent polling had put Labor down to 24 per cent which made him want to “bang my head against a table”, although they said Starmer’s leadership was probably safe for at least another year. “If Labor starts to look like they haven’t got a coherent or even reasonable narrative to sell the market then they’re doomed, no?”

Data Visualization by Keith Frey