Rachel Reeves is heading for a 1970s-style debt ‘nightmare’, experts warned last night.
On another turbulent day on the financial markets, the pound fell sharply against the dollar and the Government’s borrowing rates rose to a 27-year high.
There were also warnings that the growing crisis could hit mortgage rates if it continues.
Last night, Ms Reeves was due to fly out on a controversial trip to China, despite calls for her to stay in the UK to ‘fix the mess her Budget created’.
Ms Reeves was warned that Britain could suffer a repeat of the 1976 debt crisis when then-Labour chancellor Denis Healey had to go cap in hand to the International Monetary Fund for a bailout.
The crisis crystallised Labour’s economic failure, and the government was swept aside by Margaret Thatcher’s Conservatives at the polls three years later.
Martin Weale, a respected former member of the Bank of England’s rate-setting monetary policy committee, told Bloomberg News: ‘We haven’t really seen the toxic combination of a sharp fall in sterling and long-term interest rates going up since 1976. That led to the IMF bailout.’
He added: ‘So far we are not in that position but it must be one of the Chancellor’s nightmares.’
Nigel Green, chief executive of financial advisory firm deVere, added: ‘The Chancellor’s inability to reassure markets is fanning fears of an economic implosion, with austerity looming as the only option to restore credibility – a brutal throwback to 1976.’
Experts warn Rachel Reeves is heading for a 1970s-style debt ‘nightmare’
On another turbulent day on the financial markets, the pound fell sharply against the dollar and the Government’s borrowing rates rose to a 27-year high
Yields on government bonds – which reflect the cost of government borrowing – continued to rise, up eight basis points to 4.89 for 10-year gilts. That is the highest since 2008
The pound dropped nearly 1 per cent to just under 1.23 US dollars – its lowest level since November 2023
The warnings are the latest to conjure up the spectre of the 1970s when Britain last suffered a crippling bout of ‘stagflation’, in which rising prices couple with low growth to produce an economic doom loop.
Shadow Chancellor Mel Stride said the public were having to ‘pay the price for yet another socialist government taxing and spending their way into trouble’.
He said the rise in borrowing costs threatened to ‘swallow up’ the proceeds from the record tax rises imposed at the Budget, and suggested the market turbulence was likely to ‘impact mortgage costs and lending across the economy’.
Ms Reeves ducked a Commons debate on the crisis to prepare for her controversial trip to China, where she hopes to strengthen trade ties despite the communist regime’s dire human rights record – and warnings that cosying up to Beijing could undermine the UK’s national security.
Sir Iain Duncan Smith, one of several MPs sanctioned by Beijing for speaking out on human rights, said: ‘The Chancellor should not go to China.
‘The trip is pointless – as the disastrous “Golden Era” showed, the murderous, brutal, law-breaking, communist regime in China will not deliver the growth the Labour government craves. Instead, she should stay home and try to sort out the awful mess her Budget has created.’
Former Treasury select committee chairman Harriet Baldwin accused the Chancellor of ‘fleeing to China’ after realising ‘she is the arsonist’ with the economy.
She told the Mail: ‘The Chancellor needs to take responsibility for the ongoing ramifications of her Budget choices and return to face Parliament.’
On another turbulent day on the financial markets, the pound fell sharply against the dollar and the Government’s borrowing rates rose to a 27-year high (pictured: City of London)
Liberal Democrats leader Ed Davey added: ‘Instead of jetting off to China, the Chancellor should urgently come before the House of Commons to cancel her counter-productive jobs tax and set out a real plan for growth.’
In a highly unusual move, the Treasury issued a public statement on Wednesday reassuring the markets that the Chancellor’s commitment to her fiscal rules was ‘non-negotiable’ and that she would maintain an ‘iron grip’ on the public finances.
Treasury sources said she was drawing up contingency plans for emergency spending cuts if a new forecast by the Office for Budget Responsibility in March shows she is on course to break her own debt rules.
Treasury chief secretary Darren Jones, who took her place in the Commons yesterday, repeated the commitment to the fiscal rules – and suggested spending would be squeezed if borrowing costs forced the public finances off course.
Mr Jones played down the significance of recent market turmoil, saying it was ‘normal for the price and yields of gilts to vary when there are wider movements in global financial markets’.
And he defended the Chancellor’s trip to China, describing it as ‘an important visit for trade and investment in the UK economy’.
Yesterday, the pound slumped close to $1.22 versus the US dollar, the lowest level since November 2023 – adding to sharp falls the previous day. One City analyst joked that sterling’s slide suggested it was becoming the ‘Great British peso’.
Yields on UK ten-year bonds climbed above 4.9 per cent, a fresh 17-year high, while yields on 30-year bonds rose above 5.4 per cent, the highest since 1998.
Keir Starmer hit back against Liz Truss yesterday after her lawyers sent him a letter insisting his claim that she ‘crashed the economy’ was defamatory
Ms Truss’s 49-day tenure in No10, and the economic fallout from it was a key feature of the election campaign for Labour – with few Tories willing to defend her.
Eva Sun-Wai, a fund manager at M&G Investments, said: ‘The worry is that investors have just lost faith in the UK as a place to put their assets.’
Keir Starmer hit back against Liz Truss yesterday after her lawyers sent him a letter insisting his claim that she ‘crashed the economy’ was defamatory.
No 10 asked whether the former prime minister would also be writing to ‘millions of people up and down’ the country who they said shared Sir Keir’s view.
A spokesman added that the PM would not soften his language about Ms Truss’s premiership.