Chancellor Rachel Reeves is facing a difficult time, with government borrowing costs at a 16-year high and a 14-month low for the pound against the dollar. Opposition parties have accused her of leaving the country during an economic crisis following her departure to China, accompanied by Bank of England governor Andrew Bailey on a 12-hour flight to Beijing. Reeves has pledged to avoid borrowing to fund day-to-day expenses and to reduce national income by the end of parliament, with the particular fiscal rules denoted in the Budget described as non-negotiable by the Treasury, but the recent weak performance of the pound and government debt may prove problematic for these goals.
Although the markets have stabilised from the middle of last week, the situation with UK government debt alone could cause significant issues for the Chancellor’s Budget calculations. This could require an adjustment in the budgetary mathematics although this need not necessarily result in any wider economic impact for households or firms. However, economists have warned of high inflation levels, particularly with reference to President-elect Trump’s trade and economic plans, with the UK at risk of being negatively impacted by both fluctuating currencies and slow growth.
Despite the warnings, firms have delivered strong results, leading to the conclusion that consumers are more able to weather turbulent economic times than had been presumed. This could prove a positive indicator for a potential 2025 growth plan, though current “Bidenomics” may require additional financing and harsher trade-offs, with the UK potentially at risk of being sidelined by any escalation in global trade tensions.
Nevertheless, the Chancellor does have contingency measures in place: if an emergency or significant economic shock occurs, the“fiscal mandate” may be temporarily suspended. But with an ongoing spending review and a majority of 170 MPs in the House of Commons, this appears unlikely to be needed at present. The key issue for Reeves and the UK government at present is their broader economic policy which whether credible or not, could prove decisive in matters relating the pound and UK debt
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