Gilt investors have warned that Rachel Reeves may need to raise taxes

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Gilt investors have told Britain’s Labor government that it may need to raise more than tax to maintain credibility in the bond market after borrowing costs peaked after the financial crisis.

Chancellor Rachel Reeves has vowed not to repeat the £40bn Budget tax hike in October, which many businesses have seen as a drag on economic activity. But many bond market participants have warned that the UK government will need to look to taxes to shore up its finances after losing room to maneuver under its own fiscal rules.

Mahmood Pradhan, head of global macro at the Amundi Investment Institute, said the UK government “must not box itself in by avoiding a tax hike” and that “a promise of monetary restraint may not be enough to convince the markets”.

A punishing few months on global bond markets, driven in part by US President-elect Donald Trump’s deflationary policies, have pushed the UK 10-year bond yield to 16 and defied the government’s budget rules, defying part of the crisis. .

On Tuesday, Revs He told Parliament. She was “absolutely committed” to sticking to her fiscal rules while deflecting questions from MPs about whether she would be forced to cut public spending.

A new tax increase would be politically toxic and further undermine Reeves’ political standing.

UK 10-year bond yields rose to a 16-year high of 4.93 percent last week from 3.75 percent in mid-September, as global bond selling mixed with investors on fears that the UK economy is heading into recession. – Persistent inflation pressures restricting the Bank of England from cutting rates to support the index economy.

The 10-year bond yield rose to 4.82 percent in morning trading after inflation data on Wednesday opened the door to a faster BOE rate cut. Products, on the contrary, move to prices.

Ranjiv Mann, senior portfolio manager at Allianz Global Investors, said any further increase in output would “increase pressure on the government to take steps to address the budget deficit in March rather than waiting for the budget deficit in the autumn.”

The government could take “corrective measures” such as real-time spending squeezes in so-called unpredictable sectors such as local government or extending personal income tax thresholds beyond 2028, Mann said.

Robert Tipp, head of global bonds at asset manager PGIM, thinks the UK government could be constrained by market movements rather than relying on spending restrictions. “It’s a classic example of hope being a bad strategy,” he added.

Peder Beck-Fries, chief economist at bond giant Pimco, said it was increasingly likely that the UK government would need to address its worsening fiscal position.

“We will be surprised if the government does not adjust taxes or spending to meet these fiscal rules. . . We expect the government to maintain its fiscal credibility and adjust to these variables.

There is now a risk, investors have warned, that if the government doesn’t come up with more fiscal stimulus, gilts will sell higher as investors build more.Fiscal risk premium” He went into debt.

Reeves stressed on Tuesday that global conditions were pushing up bond markets around the world and reiterated her pledge to hold just one budget a year.

The Office for Government Budget Responsibility is due to release its updated economic and fiscal forecasts on March 26.

If recent bond yields continue, the £9.9bn fiscal core will be enough to wipe out more than Reeves left herself in October’s budget. Some economists also expect the OBR to lower its 2025 growth forecast from the 2 per cent forecast released in October.

A reduction in long-term growth forecasts will further hit the Chancellor’s budget core, adding to budgetary challenges.

Robert Dishner, senior portfolio manager at Neuberger Berman, said the government could consider adjusting policies such as increasing the cost of employers’ national insurance, reducing inflation and even conducting an external review of the efficiency of government spending.

“Are there overspends? The government might find some savings here or there.

A Treasury spokesman said: “This Government’s commitment to ensuring fiscal rules and sound public finances is non-negotiable. The Chancellor has indicated that tough decisions will be taken on spending, with the spending review ongoing.

Additional reporting by George Parker