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London, United Kingdom-March 26, 2025: British Chancellor of the chessboard Rachel Reeves leaves 11 Downing Street before the announcement of the spring declaration to the House of Commons in London, United Kingdom on March 26, 2025. (Photo credit should read Wiktor Szymanowicz / Future Publishing via Getty Images)
Wiktor Szymanowicz | Future publishing | Getty images
The British government plans to strengthen public spending – but market observers warn that proposals may send soles via the bond market which still inflates $ 143 billion per year.
British Minister of Finance, Rachel Reeves, announced Wednesday that the government inject billions of pounds In defense, health care, infrastructure and other areas of the economy, in the years to come. A day later, however, official data showed the British economy shrinking by a 0.3% larger than expected in April.
Financing of public spending in the absence of a growing economyLeave the government two options: collect funds through taxation or take more debts.
It can be borrowed to issue obligations, known as regards to the United Kingdom, on the public market. By purchasing licks, investors mainly lend money to the government, the return on the obligation representing the return that the investor can expect to receive.
Golden yields and prices move in opposite directions – the decreased moving prices, and vice versa. This year, golden yields have experienced volatile movements, with investors sensitive to geopolitical and macroeconomic instability.
Long -term borrowing costs of the British government Enriched with summits of several decades in Januaryand yield on 20- And 30 year old gilts continues to hover firmly above 5%.
Official estimates show that the government should Spend more than 105 billion pounds sterling (142.9 billion dollars) by paying interest On its national debt during the year 2025 – 9.4 billion pounds higher than at the time of the fall budget last year – and 111 billion sterling of annual interest in 2026.
The government did not say Wednesday how its newly revealed expenditure gusts will be funded and have not responded to the request for CNBC comments on where the money will come. However, in her Fall budget last yearReeves described the hiking plans both taxes and loans. Following the budget, the Minister of Finance prompted Do not increase taxes again during the current mandate of the Labor government, saying that the government “will no longer have a budget like this”.
Andrew Goodwin, British chief economist at Oxford Economics, said the British government could be forced to go even further with its expenses, with NATO exalted To increase its objective of defense expenditure for Member States to 5% of GDP, and once Get around on winter fuel payments for the elderly And Other possible reforms of social assistance are taken into account.
In addition, Goodwin said, the United Kingdom office for budgetary responsibility is likely to make “unfavorable revisions” to its economic forecasts in July, which would lead to a drop in tax receipts and higher loans.
“If the recent movements in the pricing of the financial markets are maintained, the debt service costs will be around 2.5 billion pounds sterling ($ 3.4 billion) Spring“Goodwin warned in a note on Wednesday.
“ Very fragile situation ”
Mel Stride, who is the ghost chancellor in the UK’s opposition government, CNBC Box Europe’s “Squawk Box Europe” said that the expenditure review had raised questions about the question of whether “a huge amount of loan” will be involved in the financing of government’s budgetary strategies.
“”[Government] Borrowing has consequences in terms of higher inflation in the United Kingdom … and therefore interest rates [are] Longer longer, “he said. [pounds] A year is twice what we spend in defense. “”
“I am afraid that the global economy will be in a very low position to resist the type of expenses and loans that this government announces,” added Stride.
Stride argued that Reeves will “almost certainly” increase taxes again in his next budget announcement due in the fall.
“We found ourselves in a very fragile situation, especially when you have prices in the world,” he said.
Rufaro Chirizeri, head of fixed income securities for the British islands of RBC Wealth Management, told CNBC that the increase in borrowing costs endangered the “tax already in tax danger”.
“This reduced height could create a snowball effect, because investors could potentially become nervous to have British debt, which could lead to a new sale until budgetary stability is restored,” he said.
Iain Barnes, director of investments at Netwealth, also told CNBC on Thursday that the United Kingdom was in “a state of budgetary fragility, so the place for the maneuver is limited”.
“The market knows that if growth disappoints, then this year’s budget may have to offer higher taxes and an increase in loans to finance spending plans,” said Barnes.
However, April Larusse, head of investment specialists at Insight Investment, argued that there were means of keeping debt charges.
The United Kingdom’s debt management office, which emits licks, has the possibility of reshaping the emission reasons-maturity and the type of nickname issued-to help the government control its loan costs, she said.
“With the average yield on licks from 1 to 10 years to C4% and the yield over 15 years + 5.2% licks, it is possible to make the costs of financing the debt more affordable,” she explained.
However, Larusse noted that the interests of debt for the British government would have reached the equivalent of approximately 3.5% of GDP this exercise, and that excessive expenses could worsen the burden.
“This increase is motivated not only by higher interest rates, which gradually translate into higher cuts of coupons, but also in high levels of public spending, aggravating the budgetary burden,” she said.
