Rising Yields Show Reeves Can No Longer Talk Her Way Through This

Above: Rachel Reeves will update parliament following her return from China. Picture by Kirsty O'Connor / HM Treasury.

The British Pound and UK government bonds are under pressure ahead of an expected statement by Rachel Reeves, the Chancellor.

Writing in The Times ahead of her appearance, Reeves says she will confirm to parliament that "growing the economy is the number one mission of this government."

"This government is intent on creating growth that raises the living standards of working people across Britain by putting money in their pockets, creating wealth and opportunity," she says.

These lines are well rehearsed and were routinely rolled out when courting businesses ahead of the General Election.

However, the rise in government yields ahead of her appearance confirms talk is no longer enough, and markets now need concrete steps that will provide evidence the government can put the UK economy on a growth footing.

The fear is that mere talk will fail to stimulate the growth the UK needs to fund its huge and growing debt burden, leaving Reeves with no option but to execute a series of spending cuts and tax rises, with the lion's share of the work falling on taxes.

"All the chatter on FICC desks is that rather than reconsider the spending side of the ledger; the UK govt will come back for more tax in a self-defeating cycle. Again, whilst the govt has said it won't, it also hasn't definitively ruled it out - so no one really believes the promise as Reeves is seen to have lied in opposition about tax plans," says Simon French, Chief Economist & Head of Research at Panmure Liberum.

Confidence in Reeves' credibility and verbal effectiveness - words can engender confidence - has been significantly undermined as her first budget proved the antithesis of pro-growth.

French explains that the problem facing Reeves is that bond market investors, who can choose whether to own UK debt, have mainly noticed large public sector pay settlements, which come despite more than 25 years of flat public sector productivity. In addition, there has been a sharp drop in economic sentiment reported since Labour came to power.

"The assessment is that this is simply a 'crowding out' of private sector activity by lower value public sector activity - and whether that conclusion is right or wrong, investors don't like what they see," says French.

Reeves says she wants to foster growth, but in October blindsided businesses with a significant tax raid. Simon Roberts, the chief executive of Sainsbury's, said the decision to increase employer National Insurance from April was "not something anyone expected – certainly, it wasn’t expected at the speed it was coming at".

Businesses need certainty and a clear cost roadmap. Surprising them with significant cost increases means plans need to be torn up, savings found and charges raised.

"Business sentiment took a sharp turn for the worse in the latter months of the year, as business leaders digested the full implications of the government’s early policy decisions. Business was dismayed by the tax increases announced in the Autumn budget, and also concerned by the aggregate impact of proposed employment law reforms," says Dr. Roger Barker, Director of Policy at the Institute of Directors.

Roberts says Sainsbury's typically on 12-month horizons or longer, meaning there was little time to adapt.

Kate Nicholls, CEO of UKHospitality, said, "it's the halving of the threshold which caused the main challenge with lack of notice on economic shock of cost - business budgets were left with a massive black hole."

The government raised the tax rate paid by employers on employee salaries while slashing the pay rate at which the National Insurance charge is levied.