Highest inflation in G7, higher debt costs than Liz Truss, worst fall for pound since 2023

All this has been achieved by Rachel Reeves in her first six months as Chancellor

Montage © Facts4EU.Org 2025

Reeves jets off to China as her economic plans enter a tailspin costing £10bn in two days

The Chancellor’s plans for spending and tax revenues went spiralling downwards on Wednesday (08 Jan 2024), as she was hit with a triple-whammy of economic bad news. Economists have already started talking of Rachel Reeves having to introduce yet more tax rises on top of the £40bn raid in her October budget.

It looks likely she will either require more tax increases, or more spending cuts, or - more likely still - a combination of both in order to restore market credibility. Unfortunately for Ms Reeves, analysts believe things are set to get worse.

What does all this mean?

The pound has fallen by steadily and dramatically by 10.7 cents (8%) from its level just before Reeves’ budget. Generally as interests rate rise, so does the pound-dollar exchange rate. It is a measure of the markets’ negative assessments of Rachel Reeves’ growth plans that sterling was marked down so heavily. Put simply, the markets are pricing UK debt higher because of what they perceive to be the overall risks for the UK economy. And as the appetite for government bonds falls, so too does the pound.

Rachel Reeves must now be regretting saying that the 4.38% rate on one day in 2022, (following the Kwarteng-Truss budget), meant that the PM had crashed the economy. Reeves’ own policies have now helped to put the rate up even higher (peaking at 4.90%) and have kept it up for longer.

The UK's bills just went up by £10bn

Analysts estimated the latest rise in gilt yields - if sustained - would add around £10 billion ($12 billion) a year to Britain's annual debt interest bill compared with the Office for Budget Responsibility's (OBR) 30 October forecast. With the OBR watchdog due to update its her medium-term borrowing targets in six weeks’ time (26 March 2025) it is increasingly likely to predict the Chancellor will overshoot.

As this Government places so much credence on the OBR’s forecasts – despite them never remotely being correct – any downgrade from the OBR will immediately constrain Rachel Reeves and will result in a search for a re-balancing, either by imposing more tax rises or spending cuts, or a combination.

Reeves and officials depart UK for China, on “Crisis What Crisis Airlines”

With the economy making the headlines for all the wrong reasons, the Chancellor, the Governor of the Bank of England, and the CEO of the Financial Conduct Authority all flew out of the country yesterday, to China. They took their top teams with them, for a series of meetings with members of the Chinese Communist Party.

With the US scheduled to make its own announcements today on key employment data, opposition politicians were strident in calling for her to stay and maintain what she has referred to as her ‘iron grip’ on the economic crisis. Their words fell on deaf ears.

In an extraordinary departure from common practice, HM Treasury was forced to make a rare statement yesterday: “No one should be under any doubt that meeting the fiscal rules is non-negotiable and the Government will have an iron grip on the public finances.”

The Shadow Business Secretary, the Rt Hon Andrew Griffith MP, was unimpressed :

“The Treasury would normally stick pins under their nails rather than make any public comment, so it shows a degree of real concern. In my experience it is exceptionally rare for the Treasury in this way to make that sort of comment. It is a classic of its genre - all it does is publicise the fact that the markets are right to be concerned.”

Truss versus Starmer - Starmer refuses to apologise

Yesterday morning Liz Truss’s lawyers sent what is known as a ‘cease and desist’ letter to Sir Keir Starmer, requiring him to stop his repeated statements that their client had “crashed the economy” when she was Prime Minister. This is of course highly relevant to the current crisis, as the 10-year gilt rates have risen significantly above the brief peaks after the Truss-Kwarteng mini-budget.

The lawyers refer to these rates in their letter: “Those rate movements were caused by the Bank of England, and in particular by its poor handling of the LDI crisis, and its regulatory failures. The Bank of England is and was independent of Government control. Thus the relevant rate changes were not ‘caused’ by our Client.”

They go on to quote from the reputable economist Dr Andrew Lilico :

“It is clear that there was no economic crash in or following the period of the Truss Administration. Economic output did not fall. It did not even decelerate relative to its previous trend or to prior expectation. Quite the reverse, GDP growth was its fastest for some considerable time in the month and quarter following the mini-Budget. There was no rise in unemployment, which stayed at or about historic lows. There was no sustained loss of wealth. The financial market volatility of September/October 2022 had no material enduring economic impacts. Gilts yields fell back within a short period of time. The value of sterling on international currency exchanges recovered the same way. There was no sustained material impact on mortgage rates. And the Bank of England made a profit on its intervention in financial markets in September / October 2022 not a loss, so there was no enduring fiscal impact either.”

When the No.10 spokesman was asked yesterday if Sir Keir had any plans to moderate his language based on the lawyers’ letter, he said simply: “No.”

[ Sources: Bank of England | ONS | OECD | The Rt Hon Liz Truss | Hansard ] Politicians and journalists can contact us for details, as ever.

Brexit Facts4EU.Org, Fri 10 Jan 2025

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