Rachel Reeves will hold talks in China today amid growing fears over the state of the UK economy.
The Chancellor flew to Beijing for a planned trip to bang the drum for trade and investment – and to revive ties after years of frosty relations. But her visit risked being overshadowed by economic turmoil, as borrowing costs surged after yields on UK bonds hit the highest level since the 2008 financial crisis.
Experts warned the turbulence could mean the Chancellor could be forced to consider tax hikes or spending cuts to stay within her strict fiscal rules. Culture Secretary Lisa Nandy said Ms Reeves was “absolutely right” to ignore Tory calls to abandon the trip – and she was on course to get the economy growing again.
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Ms Nandy said: “That is why it is absolutely right and proper that the Chancellor is taking seriously our relationship with the world ’s second largest economy and is in China this weekend. We are confident we are on track to be the fastest growing economy in Europe.”
She sought to downplay concerns about the economic turmoil, saying: “I don’t think we should be worried. It’s obviously something we take very seriously, but these are global trends that have affected many countries, most notably the United States, as well as the UK.
“We are still on track to be the fastest growing economy, according to the OECD in Europe.” However she added: “I’m not for a moment saying it is all going swimmingly.”
Sir John Gieve, a former Bank of England deputy governor, warned the Chancellor may have to consider “very severe” spending cuts if the turmoil derails her economic plans.
He said: “The choice she is going to face in the spending review and then the budget in the autumn, is ‘Can I raise borrowing?’ – and the increase in interest rates that’s happened now, if it continues, will decrease her scope for doing that within her rules. Or do I increase taxes again? Or do I actually institute some very severe reductions and squeezes on public services?”
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Ben Zaranko, Associate Director at the IFS, said she was facing “a rather unenviable set of options”, largely due to the dire economic inheritance and global economic factors. “If higher interest rates wipe out her so-called ’headroom’, something will have to give,” he said.
The Treasury said making working people “secure and better off” was at the forefront of the Chancellor’s mind ahead of her talks with vice premier He Lifeng. She is expected to challenge her counterpart on China’s support for Russia in Ukraine and raise concerns over constraints on rights and freedoms in Hong Kong.
Speaking ahead of the visit, Ms Reeves said: “Growing the economy and raising living standards is front and centre of this government’s Plan for Change. That growth must be secure, resilient, and built on stable foundations, including through careful pragmatic cooperation with international partners.
“By finding common ground on trade and investment while being candid about our differences and upholding national security as the first duty of this government, we can build a long-term economic relationship with China that works in the national interest.”