Visual analysis: How the markets boxed in Rachel Reeves
Rachel Reeves will deliver her spring statement on Wednesday against a backdrop of weak economic growth, rising global uncertainty and higher government borrowing costs.
After a turbulent period since her October budget, she is expected to argue the world has changed. Few places illustrate that more clearly than the financial markets, where conditions have turned against the chancellor.
The cost of government borrowing – as represented by bond yields – has risen sharply since the autumn; partly driven by domestic factors, but also global worries over Donald Trump hitting growth and stoking inflation.
The yield – in effect the interest rate – on 10-year UK government bonds has reached 4.6%, surpassing the levels during the most turbulent days of Liz Truss and Kwasi Kwarteng’s mini-budget.
But the rub for Reeves is how this interacts with the UK’s stock of debt, which has ballooned amid the economic shocks of recent years to more than £2.6tn – a sum equal to almost every penny of annual economic output.
Paying the interest on this debt was forecast in October to cost the government about £105bn this year, representing about 8% of total public spending.
However, the recent rise in borrowing costs is expected to drive this higher.
Economists forecast this will lead the Office for Budget Responsibility (OBR) to judge the £9.9bn of headroom the chancellor kept in reserve against her self-imposed fiscal rules has been wiped out – in a shortfall the government has sought to address by cutting benefits.
Here’s how we got here.
While other chancellors may have seen high bond yields, in the case of Reeves, it comes alongside the highest levels of debt in decades.
The UK’s debt stock is now verging on 100% of GDP, having been pushed up by governments’ responses to the 2008 financial crisis and then the Covid pandemic.
It is a level of debt as a share of GDP not seen since the 1960s, in the aftermath of the second world war – and, when combined with high bond yields, it has led to a rise in debt interest payments.
In nominal terms, debt repayments account for about £100bn of government spending.
That is larger than the UK’s entire education budget – £82bn in 2023-24 – and more than half of the annual NHS budget – £171bn.
Such a large fiscal pressure erodes Reeves’s headroom against her self-imposed rules to limit borrowing and debt levels – a point she made while defending the government’s decision to cut disability benefits in an attempt to rein in the UK’s welfare bill.
She told Bloomberg TV: “When we’re spending £100bn a year on servicing government debt, I don’t think anyone could seriously argue that we don’t need to get a grip on government borrowing and government debt. It is important that there is headroom against the shocks we face.”
Guardian graphic. Debt repayment, education and defence spending figures via OBR. Cost of lifting child benefit cap is via 2024 estimate from the Institute for Fiscal Studies
The government’s debt interest spending had been generally falling since the late 1980s. Relative to government revenues, the cost of servicing the national debt fell to the lowest level since the 1690s. The bill in cash terms dropped to as low as £25bn in 2020 – about 1.2% of GDP – even as the national debt climbed to a postwar high.
Some have argued that Reeves has been overly focused on finding savings and reining in the UK debt.
Amid the debate over welfare cuts last week, former Bank of England governor Charlie Bean warned the chancellor against “fiscal fine-tuning” in an attempt to keep OBR forecasts in check.
But, with new OBR forecasts set to be revealed by Reeves on Wednesday as she delivers her spring statement, the scale of debt repayments will be a key trend to watch.
Their path over the next four years may very well determine Reeves’s chancellorship.
