Juan Pedro Marín Arrese | The markets have been battering the UK gilts since Rachel Reeves delivered a disappointing budget in October. A sizeable increase in taxes but proving unable to fill the gap inherited from the last Conservative government did not seem like the best recipe to address the looming stagflation. Fears that ongoing deterioration might force the Chancellor to tap into taxpayers’ money again in a couple of months further dented investors’ confidence. Not all the blame falls on Chancellor Reeves. The US economy’s strong performance and overriding expectations that the incoming Trump administration’s policies will fuel inflation are sharply driving up T-bond yields worldwide. The worst scenario for the UK government’s bold move on taxes. 10-year yields have hiked half a percentage point, close to 5%, the highest level for 16 years. A full-fledged crisis might unfold should any external shock emerge. From January 20th, we will probably receive the kind of nasty news bringing about widespread disruptions. Thus, the UK Faces a grim scenario.
The British government’s only escape route is ensuring growth. It has announced a sweeping reform plan to bolster the economy by cutting red tape and increasing the efficiency of public services. Yet, implementing reforms takes longer than expected and, too often, comes short of their original ambitions. While most ministers seem well aware of the shortages and dysfunctions, few prove able to perform their reshuffling goals. Any change faces resistance and involves a political cost, a prospect politicians are eager to avoid.
The UK economy badly needs a shot in the arm to prevent it from spiralling into a vicious cycle of low growth and high inflation. Sharply raising taxes and wages doesn’t seem the best way to achieve this target. Keith Starmer stresses that Labour policies will always aim to enhance the working class’s living standards and welfare. Rachel Reeves’ clumsy budget may inadvertently shatter that dream.
