Rachel Reeves was warned she faces a brutal choice between tearing up her spending plans and hiking taxes again today as she scrambles to calm markets. Sterling tumbled to its lowest level against the US dollar for over a year this morning as investors continued to push up risk premium on UK gilts - the way the state finances its activities.
Although the volatile mood seemed to be abating this afternoon, economists believe that with growth stalling and 'sticky' inflation Ms Reeves will struggle to balance the books. Yields on government bonds have been rising around the world amid fears over economic prospects and Donald Trump potentially imposing tariffs. However, the impact has been particularly acute in the UK after the October Budget pumped up borrowing to invest in infrastructure and mounted a huge tax raid on business to fund spending and public sector pay deals. Some analysts argue that the problems are more serious than after Liz Truss's disastrous mini-Budget in 2022 - with comparisons even made to the 1976 IMF bailout. The unusual combination of the currency weakening and gilt yields increasing is seen as particularly worrying, with a Bloomberg index pointing to low liquidity in the bond market. The Treasury has insisted Ms Reeves views her fiscal rules, including balancing day-to-day spending by 2029, as 'non-negotiable'. She has batted away calls from the Tories and Lib Dems to cancel a trip to China this weekend to manage the situation. But the Chancellor refused to come to the Commons to answer an urgent question on the borrowing costs this morning - instead sending her deputy Darren Jones. MPs shouted 'where is she' as Mr Jones argued that the markets were functioning in an 'orderly way'.
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