A former Bank of England economist has cautioned that Labour risks losing the upcoming election if rising government borrowing costs force Rachel Reeves to reinstate austerity measures.
Erik Britton, who previously served as an economist at the Bank of England and now leads Fathom Consulting, highlighted that the Chancellor’s fiscal plans are jeopardised by increasing bond yields. This surge has significantly reduced the remaining £10 billion in the Budget’s fiscal flexibility.
Speaking to Bloomberg, Mr. Britton stated, “The risk now is that they get blown irrevocably off course because they’ve lost control of the fiscal position and get forced into austerity and tax rises.”
He further added, “They could survive a couple of years, but that would be the end. They’d be trounced at the next election.”
Chancellor Rachel Reeves Absent from Public View Amid Financial Market Turmoil
Rachel Reeves has not been seen in public since her breakfast meeting with the Institute of Directors (IoD) on Thursday morning.
Later that day, the Chancellor failed to appear in the House of Commons to respond to an urgent question from Shadow Chancellor Mel Stride regarding the instability in Britain’s financial markets.
Subsequently, Reeves departed for China on a long-scheduled trade mission, despite numerous calls for her to remain in the UK to address the escalating government borrowing costs.
Goldman Sachs Warns Rising Borrowing Costs Could Stifle UK Economic Growth
Economists at Goldman Sachs have cautioned that escalating borrowing costs under Chancellor Rachel Reeves will lead to higher interest rates on mortgages and business loans. This increase is expected to negatively impact the economy and further strain public finances.
James Moberly from Goldman Sachs stated that the UK economy is now projected to grow by only 0.9% this year, significantly below the 2% forecasted by the Office for Budget Responsibility during the October Budget. The rise in interest rates within financial markets is exacerbating the economic downturn.
“We anticipate that higher yields will serve as an additional barrier to growth by increasing household remortgaging costs and weakening investment. The recent rise alone is expected to drag growth by approximately 0.1 percentage points this year,” Moberly explained.
This warning emerges as the Government’s 10-year borrowing costs in bond markets reach their highest levels since 2008, driven by concerns over the magnitude of the Chancellor’s borrowing strategies.
Despite urgent calls for her to stay in the UK amid financial market instability, Ms. Reeves has opted to proceed with a pre-planned trade mission to China.
