The Treasury is on the defensive today amid concern over a rise in the cost of government borrowing. Meanwhile, the foreign secretary has outlined a new sanctions regime targeting people smugglers – and the government claims it’s making progress removing illegal migrants.
Thursday 9 January 2025 19:26, UK
Please use Chrome browser for a more accessible video player
Now joining Sophy Ridge on the Politics Hub is Rupert Harrison, the former chief of staff to ex-chancellor George Osborne.
Sophy asks about the UK’s relationship with China, and whether Chancellor Rachel Reeves is right to build links to a country with so many human rights concerns.
The chancellor will head to China this week in a bid to build bridges, meeting with the country’s vice-premier He Lifeng in Beijing.
Mr Harrison, who ran as a Conservative candidate in Bicester and Woodstock last July, said it’s “not going to be a great look” if “market volatility is still going on”.
Government pursuing ‘strange strategy’
He says: “It’s a slightly strange strategy that the government has when we have President [Donald] Trump about to arrive in the White House.
“He is going to be putting in credible pressure on allies in Europe to get much tougher on China, particularly when it comes to technology, export controls and all the things he’s extremely concerned about.
“For the British government now to be trying to mend links with China in the middle of all that controversy, I think, is going to put them at odds with that, and it’s going to make their negotiations with the US over things like tariffs even more difficult.”
Now joining Sophy Ridge on the Politics Hub is former Liberal Democrat leader Vince Cable.
Mr Cable, also a former business secretary, was asked whether fluctuations in the economy are standard market turbulence – or there’s something more concerning going on.
“This is worrying, but it’s not a crisis,” he says. “A lot of the increase in the long-term interest rates… is internationally driven by essentially what is happening in the US.
“But Britain has to be careful, we are dependent on the kindness of strangers – we’re a borrowing country – so we’re very much affected by rising real interest rates.”
‘We should be avoiding panic’
Pressed if Rachel Reeves has had any impact on the economy, Mr Cable says the changes are largely an “international phenomenon”.
“The budget didn’t go down well, but so much because of what they did, but the problem goes back to opposition. I think the Labour Party ringfenced about three quarters of government revenue so it couldn’t increase taxes on the things that probably should have been taxed.
“So you were left with economically damaging measures like the increase in national insurance.”
But Mr Cable is clear: “We should be avoiding panic.”
Sophy points out his party’s leader Sir Ed Davey appears to disagree on whether Ms Reeves should go ahead with a planned trip to China, rather than stay behind to try to reassure the markets.
“She [Rachel Reeves] is much better concentrating on what she’s proposing to do, which is to maintain good economic relationships with both superpowers (China and the US),” he replies.
Our deputy political editor Sam Coates says while the government is “absolutely not” facing an economic crisis, the chancellor has a “big problem” in front of her.
Ultimately she’s falling victim to factors beyond her control, Sam says, when we see the cost of government borrowing going up.
The arrival of Donald Trump this month is perhaps the biggest of those, with his economic policies – tariffs, for example – potentially set to be even more inflationary.
“All of that is going to have an impact of pushing up the cost of government debt” here in the UK, says Sam – and you can watch a full breakdown from our economics and data editor Ed Conway below.
Starmer has trusted Reeves, but could that trust run out?
But, Sam adds, “there’s a feeling in Number 10 they aren’t keeping a close enough eye on Rachel Reeves and what the Treasury is up to”.
Some “feel a bit taken aback” by the response to her policies – they “trusted her” and things haven’t gone as they’d hoped.
If a spending squeeze is needed in the months ahead to deal with the economic problems, a “big set of cabinet fights” could be on the cards.
Keir Starmer’s backed her until now – but would it continue?
Sterling has fallen to its lowest level against the dollar since November 2023 – and UK borrowing costs have hit levels not seen since 1998.
This is really bad news, because it means the Treasury has less money to play with.
Watch Ed Conway talk you through the borrowing numbers:
Running the economy is actually nothing like running a household budget: it’s not as simple as saying, ‘we’ve got X amount coming in through tax, which means we can spend X amount on public services’.
The totals in the in and out columns keep changing because of things you can never fully control – growth, the cost of borrowing, the value of the pound, government bond markets.
And that’s what Rachel Reeves has found. It’s particularly difficult because she hasn’t left herself much headroom – there’s a razor-thin margin against the main fiscal rule.
An ‘Iron Chancellor’ is an inflexible one
She came into office promising to be the Iron Chancellor, sticking to her fiscal rules come what may.
It sounds strong and reassuring, but it’s also inflexible. She’s facing a worsening economic picture, but says she’s sticking to the plan.
That’s a bit like continuing to drive down the same road even when half the tarmac’s been ripped up. Things are going to get bumpy.
The independent Office for Budget Responsibility is preparing a new economic forecast in March, which the chancellor will respond to – and potentially make some adjustments to her plans.
If Rachel Reeves wants to stick to the rules, she needs more tax rises – or spending cuts.
If you thought October’s budget was painful, it may be that you ain’t seen nothing yet.
Politics Hub With Sophy Ridge is live.
Joining us tonight are economist Rupert Harrison and former Lib Dem leader Vince Cable.
And on our panel are two former political advisers – Tom Baldwin for Labour and Salma Shah for the Tories.
You can watch in the stream below or at the top of this page, and we’ll bring you rolling updates from the programme too.
As we’ve been reporting, the Treasury has been under pressure this morning over an increase in government borrowing costs.
The Tories weren’t able to drag Rachel Reeves to the Commons to field questions about the state of the economy – she instead sent her deputy, Darren Jones – but we’ve been able to commandeer our business and economics correspondent Paul Kelso for some insight.
What’s the problem?
The reason an increase in the cost of borrowing for government (in this case filling a gap from income in taxes, given Labour’s reluctance to tax working people to cover its spending plans) can cause alarm is the danger borrowing costs are pushed up for the rest of us.
“Most notably in mortgage rates,” explains Paul, which is exactly what happened following the Liz Truss mini-budget of 2022.
And what’s happening right now, Paul says, is the increase in costs of borrowing for the government now “exceeds even the rates the government was having to pay to borrow back then”.
“It is not a crisis of the same proportion by any stretch of the imagination,” he stresses, “but is a challenge for the chancellor.”
Watch: Ed Conway talks through the numbers
Why’s this happening?
Rachel Reeves set out some big public spending plans in her budget but set borrowing rules “intended to send a message to the markets”.
That message was that while the government would borrow, there was a ceiling – headroom, as it’s called.
Paul says “the problem established by this increase in borrowing costs is it increases the cost of government servicing debt”.
It therefore reduces the headroom.
What’s the Treasury doing?
The message for now is “nothing to see here”, essentially.
Darren Jones had to respond to the Tories due to them being granted an urgent question, but he insisted financial markets are “always evolving” and there’s nothing happening to cause alarm.
In practical terms, Paul says the message to the markets is that if push comes to shove, the government will either cut spending or hike taxes – and he reckons it’ll likely be the former.
Should we be concerned?
While the UK isn’t an outlier (borrowing costs have increased for Germany and, more significantly, the US), there are “some specific concerns about the resilience of the UK economy”.
Those are based on doubts the chancellor can really grow the economy while hiking taxes on businesses, which they have warned will see more people out of work or with less money in their pay packets.
It’s “not an economic crisis”, says Paul, but it is “a really challenging moment for the chancellor”.
She’s got a long flight to Beijing ahead of her today, and it’ll give her plenty to think about on the way.
An intervention by the chancellor to help shore up flagging financial market confidence in the UK economy has been ruled out by the government, amid further declines in the value of the pound.
Sterling fell to its lowest level against the dollar since November 2023 early on Thursday, building on recent losses.
A toxic cocktail of concerns include budget-linked flatlining growth, rising unemployment and the effects of elevated interest rates to help keep a lid on rising inflation.
They have also been borne out by a leap in UK long-term borrowing costs, which hit levels not seen since 1998 earlier this week.
It piles pressure on the chancellor because it signals that investors are demanding greater rewards in return for holding UK debt, adding unwelcome costs to Ms Reeves who is borrowing money to invest in public services in addition to the budget tax burden on business and the wealthy.
The number of illegal migrants being removed from the UK has hit its highest point in half a decade, the Home Office has claimed.
Since the general election, enforced returns are up 24% compared to the 12 months prior, with 2,580 foreign criminals removed.
The government claimed 16,400 people with “no right to be here” have been removed in total.
In short, the Home Office claimed Labour’s election pledge to deliver the highest rate of removals since 2018 has been surpassed.
Sir Keir Starmer – who visited a police station in London today – said it was achieved with “redeployed resources” from the axed Rwanda scheme, and warned those seeking to come to the UK illegally “you are wasting your money” by hiring people smuggling gangs.
‘Dodgy’ workplaces targeted
The Home Office also touted a crackdown on “exploitative employers”, including “dodgy car washes, nail bars, and construction sites”.
It comes after the government announced a new sanctions regime designed to prevent, combat, deter and disrupt irregular migration.
It’s time for your regular evening round-up from the Politics Hub.
Here are the main things you need to know:
Politics Hub With Sophy Ridge is live from 7pm.
Joining us tonight are economist Rupert Harrison and former Lib Dem leader Vince Cable.
And on our panel are two former political advisers – Tom Baldwin for Labour and Salma Shah for the Tories.
Stay with us for more updates and analysis until then.
A torrent of posts from X owner Elon Musk has thrown an unexpected spotlight on the issue of historical grooming gangs in the last week.
In the early 2010s, dozens of men, the majority of British Pakistani origin, were convicted of crimes including rape, sex trafficking, and child sexual exploitation that had gone undetected for years.
On the Daily, Niall Paterson is joined by our home editor Jason Farrell and Lucy Duckworth, from The Survivors Trust, herself a survivor of child abuse, to explain why the recommendations of numerous inquiries have still not been implemented.
The Survivors Trust runs a free, confidential national helpline 7 days a week for survivors of rape or sexual abuse and violence aged 16+.
You can call 0808 801 0818 or text 07860 022 956 for support.
Be the first to get Breaking News
Install the Sky News app for free
