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Chancellor to address parliament as economic pressure mounts over cost of borrowing and falling pound
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Chancellor Rachel Reeves has been warned that imposing public spending cuts would be “political suicide”, after the Treasury vowed to be “ruthless” in seeking to quell the current economic turmoil.
Ms Reeves is set to make a statement to the Commons on Tuesday following her trip to China, after the cost of government borrowing hit its highest level since the financial crisis by one measure, and the value of the pound fell.
In a bid to calm the markets, as the rise in gilt yields eviscerates the £9bn of “headroom” left in the chancellor’s Budget, leaving her at risk of breaking her fiscal rules, Ms Reeves was reportedly ordering cabinet ministers to be “ruthless” in identifying public spending cuts.
But former Labour shadow chancellor John McDonnell warned on Tuesday morning that further spending cuts would amount to “political suicide” and risked turning an economic “crisis into a recession” by taking demand out of the economy.
As speculation mounted on Monday that Sir Keir Starmer could sack her, Downing Street insisted that Ms Reeves will be the chancellor “for the whole of this parliament”.
Chancellor Rachel Reeves has insisted the government is focused on its “number one mission to grow the economy”, as she prepares to defend her trip to China.
A post on her X account said: “This government is focused on our number one mission to grow the economy. That means engaging pragmatically with international partners and always putting the UK’s national interest first.
“I will be updating Parliament on this engagement later today.”
In football manager parlance, the dreaded vote of confidence from the club chairman often shortly precedes an inevitable sacking. So when Keir Starmer said on Monday he has “full confidence” in his beleaguered chancellor Rachel Reeves, tongues started wagging on her future.
It was noticeable that the prime minister had to be asked twice before he answered the question, and he avoided saying her job was guaranteed until the next election while on camera.
Only three hours later, at an off-camera briefing, did the Downing Street official spokesperson say Ms Reeves will be chancellor “for the whole of this parliament”. That’s not the same as the prime minister doing it.
Questions over whether Ms Reeves will survive would have been unthinkable six months ago. But with the economy on the brink of a recession, interest rates set to rise and business confidence in the government at its worst point since the Covid pandemic, someone will have to take the blame.
But the question is, who would be able to step in to fill her shoes if she is pushed out with turbulent bond markets and a falling pound?
Our political editor David Maddox reports on five possible names:
News analysis: Keir Starmer gave his beleaguered chancellor the vote of confidence on Monday morning, but if he decided on a change in the Treasury who could replace her?
Reform UK is now within touching distance of Labour, a new poll has shown, as Sir Keir Starmer has been dealt a new blow when it comes to confidence in his leadership of the country.
In the first YouGov poll since the general election, Labour’s support has plummeted, while Reform’s has steadily grown to just one point behind Sir Keir’s party.
Meanwhile, the Tories have been pushed into third place just two months after Kemi Badenoch was elected leader.
The survey, conducted for Sky News, puts Labour on 26 per cent, Reform UK on 25 per cent, the Conservatives on 22 per cent, the Liberal Democrats on 14 per cent and the Greens on 8 per cent.
Our political correspondent Millie Cooke has the full report:
It comes after Nigel Farage’s party claimed to have overtaken the Tories’ membership numbers
Sir Keir Starmer’s cabinet is meeting this morning, as instability in the markets heaps pressure upon Rachel Reeves.
The chancellor is also set to face MPs in the House of Commons today.
Former Labour shadow chancellor John McDonnell has warned that spending cuts could push voters into the arms of Nigel Farage’s Reform UK.
Speaking to BBC Radio 4’s Today programme, the veteran MP said: “It’s not just us [facing market turmoil], it isn’t Britain isolated. We’ve seen what’s happened with regard to [the markets’] reaction to the potential of Trump coming in and tariffs being introduced.
“So there is a worldwide phenomenon here, there’s no doubt about it. But they are picking over some of the decisions that have been made by the government.
“And there, at those stages, when we were preparing for government, to be frank we were looking to the Bank of England who were cooperating with us to see us through the turbulence.
“There are two groups of people who make judgements on an incoming government – one is the international markets … but actually the most important people are the electorate.
“I think what has to happen here is the electorate have to be protected. Otherwise I’m afraid we’re looking at a level of disillusionment which then turns people towards, unfortunately, Reform. And I think that would be a disaster for the country.
“So I think it’s important to look at what the electoral response would be to another round of cuts.”
The pound regained its footing on Tuesday morning, after hitting fresh 14-month lows on Monday, as UK government bonds recovered some lost ground after a recent heavy sell-off.
Sterling held firm at $1.22 in morning trading, having sunk to its lowest level since November 2023 in recent days.
Government borrowing costs showed signs of stabilising, with yields on 10-year UK government bonds – also known as gilts – down three basis points at 4.86 per cent.
The yield on 30-year gilts struck its highest level for 27 years on Monday, and 10-year yields rose to fresh highs not seen since 2008.
Yields are a key indicator of market confidence, moving inversely to bond prices. They rise when investors are less willing to own the debt, meaning they will pay a lower price for the bonds.
Security minister Dan Jarvis defended the chancellor as he faced broadcasters on the Tuesday morning media round, saying she is doing a “good job” in difficult circumstances inherited by the previous government.
“The chancellor has been in China over the course of the weekend, I think that was the right thing for her to do and she’s getting on with doing a difficult job of delivering economic growth for the country,” he told Sky News.
“These are difficult economic headwinds that we’re dealing with at the moment, but I think she’s doing a good job and I think the prime minister thinks that as well.”
Rachel Reeves will move to reassure turbulent financial markets amid high Government borrowing costs as she faces a grilling from MPs on Tuesday.
The chancellor will answer questions in the Commons for the first time since her return from a trip to China criticised by political opponents for coinciding with a week of volatility for the pound and soaring yields on UK bonds.
Former Labour shadow chancellor John McDonnell has suggested that the current economic pressure will pass “fairly quickly” in the wake of Donald Trump’s inauguration and the upcoming German elections.
Describing the current market turbulence as a “crisis”, he told BBC Radio 4’s Today programme: “But I actually do think this will shift fairly quickly with the election of Trump and Trump coming into power, and then remember we’ve got the German elections coming up as well, and I think the focus might well then be on Germany and Europe overall.”
Pressed on whether he meant the chancellor must “hold her nerve”, Mr McDonnell his advice would be: “I think the scene was set to a certain extent before the election when we didn’t really have a thorough and open debate about the state of the economy and the options that we had available to us.
“I wouldn’t have ruled out the increases in income tax and wealth taxes on the wealthiest in our society the way it was, and I wouldn’t have ruled out increasing corporation tax.
“So we sort of boxed ourselves in to a certain extent.”
If this week’s update to the consumer prices index shows inflation is up by more than 3 per cent, it’s all over for Rachel Reeves, predicts our chief business commentator James Moore.
He writes: Could Wednesday’s inflation data be the end of the chancellor? If that sounds like hyperbole, let’s work it through.
“We are in the midst of a very real economic crisis, and the next update of the Consumer Prices Index (CPI) will have a very real bearing on that.
“It could be the most consequential release since inflation peaked at a shattering 11.1 per cent in October 2022.”
If this week’s update to the consumer prices index shows inflation is up by more than 3 per cent, it’s all over for Rachel Reeves, predicts James Moore
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