Pound LIVE: GBP hits three year low as Rachel Reeves’ budget bites

Rachel Reeves should cancel her trip to China and make an emergency statement to Parliament as the cost of Government borrowing continues to rise, the Liberal Democrats said.

Lib Dem leader Sir Ed Davey said: “Instead of jetting off to China, the Chancellor should urgently come before the House of Commons to cancel her counterproductive jobs tax and set out a real plan for growth.

“The country is paying an ever-higher price for the total mess the Conservative Party made of our economy, and the Chancellor needs to realise that she’ll never dig us out of this hole without a far more ambitious plan to grow our economy, including rebuilding trade with Europe.

“The Government’s misguided jobs tax is hurting businesses and hitting investment badly, pushing up . Far from funding the NHS and other public services, it is already costing money through higher borrowing costs.

“The Chancellor should look at our plans to raise revenue fairly from the big banks, the social media giants and online gambling firms – all of which are making eye-watering profits while ordinary families struggle.”

The Government has been told its “economic plan is not working” in response to the highest borrowing costs in 27 years.

Conservative backbencher Patrick Spencer (Central Suffolk and North Ipswich) said Treasury minister Darren Jones was seen by some as the future but instead he was too interested talking about the past Conservative government’s record in office.

He added: “Today borrowing costs are up, business confidence is down, and growth is going nowhere. Is it not time to admit this lefty economic experiment is not working, it is time to cut taxes and cut spending.”

Mr Jones replied: “He talks about lefty experiments, fiscal responsibility is not a lefty kind of ideology. Economic responsibility is not a lefty ideological, political experiment, it is one the British people expect.

“It’s one of the reasons the party opposite had such a historic defeat at the last election, because they lost all control and all sense when it came to the public finances.

“For a party that is supposedly the best performing party in western democracy with great leaders in the past, isn’t it a great shame what the Conservative Party has become. After its performance in 14 years, and now its route into disinformation, I feel very sorry for the members on the benches opposite.”

Treasury minister Darren Jones has defended the Government fiscal rules as the “absolute opposite of austerity” as Tory MPs said that “austerity is back”.

Conservative former minister Graham Stuart said: “It’s quite clear there isn’t going to be, if (Mr Jones) sticks to his word, any more borrowing or any more taxes. So then he leaves one option, given the numbers, and that is going to be cuts in public services.

“And I wonder whether his colleagues behind him on those benches realise that that is the reality. What word is he going to use other than austerity to describe it?”

Conservative MP Sir Bernard Jenkin (Harwich and North Essex) said: “By underlining that there will not be any tax increases, there will not be any increases in borrowing, he is effectively saying austerity is back, because there is no way that the public finances can be remedied again by another budget of wishful thinking, pretending that increased borrowing and increased spending will produce growth.”

In response to Sir Bernard, Mr Jones said: “This is not austerity. He will know full well that, what is austerity? Austerity was ideological cuts to public financing and the size of the state. It was minus 3% cuts, irrespective of what that meant for particular public services or for people across the country.

“That is far from what the Chancellor unveiled in her Budget in the autumn. It was the absolute opposite of austerity, as we increased financing into front line public services, and will continue to do so.”

A Conservative former minster has accused Chancellor Rachel Reeves of having “fled to China”, as MPs grilled the Government on its fiscal plans.

In the Commons, Dame Harriett Baldwin said: “In yesterday’s extraordinary emergency statement from the Treasury to try and calm the markets the Treasury statement paid tribute to the fact it inherited the second lowest debt in the G7.

“And is the reason that the frontbench is so empty today, the Chancellor has fled to China, that she has realised that her budget means that she now is the arsonist?”

Treasury minister Darren Jones replied: “The Chancellor is going on her trip to China, it has been well documented for many weeks, an important visit in terms of trade and investment in the economy here in the UK.

“And might I just say there was no emergency statement, or emergency intervention, these are make-belief words being propagated by members on the benches opposite. The Treasury responded to requests from journalists about headroom, as we might do in the normal way.”

Treasury minister Darren Jones declined to say whether Chancellor Rachel Reeves has departed for her trip to China as MPs questioned why she was not in the Commons to answer an urgent question on public finances.

Conservative MP for Harborough, Oadby and Wigston, Neil O’Brien, said: “I think I heard the Chief Secretary say that the Chancellor hasn’t gone to China.

“Can he just confirm, firstly, that she is still planning to go? Second, can he say if she’s not gone to China yet, why is she not here today? I think lots of people would like to hear from her.

“And third, would he confirm has the Chancellor talked to the Governor of the Bank of England about the market turbulence at any point in the last seven days?”

Mr Jones replied: “The Chancellor is going to China that has been well documented. And again, I’m sorry to disappoint (Mr O’Brien) that I’m here. I would just refer him and his colleagues to the title of the urgent question.

“The title of the urgent question is about a statement on borrowing cost and public finance, as he will know, I’m the minister for public finance. This is why I’m here answering his questions.”

Shadow chancellor Mel Stride also told MPs: “Every pound we spend on debt interest is money we cannot spend on the public’s priorities. The Government’s decision to let rip on borrowing means that their own tax rises will end up being swallowed up by the higher borrowing costs at no benefit to the British people.

“Far from this Government laying the foundations for a stronger economy, the Chancellor is squandering the endeavours of millions of hardworking people up and down our country who are now having to pay the price for yet another socialist government taxing and spending their way into trouble.

“Does (Mr Jones) not now accept that it is time to change course?”

Treasury minister Darren Jones, in his reply, said: “He asks me about the fiscal rules – as I said in my statement just now, they are non-negotiable.

“As the Chancellor set out at the budget we have two fiscal rules – one that day-to-day spending should be met by tax receipts and the second that debt should be falling as a size of the economy.”

Mr Jones went on to criticise the over their record on borrowing, saying an “absolute failure to get growth into the economy” had meant they “stacked up the country’s credit card”.

Senior Conservative MPs have pressed the Government on whether Chancellor Rachel Reeves will use her “sticky fingers” to increase taxes or borrow more.

In the Commons, former Treasury minister John Glen said: “This Government have either got to cut spending, increase taxes or borrow more, and if the cost of borrowing is increasing, that moment is going to come sooner. Which of those choices is he inclined to make and when is he going to tell the British people honestly what this Government has done?”

Treasury minister Darren Jones replied: “The fiscal rules are non-negotiable, public services will have to live within their means, we’ve set the budget.”

He added: “We have the OBR (Office for Budget Responsibility) forecast coming in March, those are the numbers departments are working to in this spending review, those are the numbers we will hold public services to when we conclude the spending review in June.”

Father of the House Sir Edward Leigh asked if Chancellor Rachel Reeves would be using her “sticky fingers” to increase borrowing or taxes, adding: “Will the minister give an absolute assurance, no more tax increases or borrowing?”

Mr Jones said the spending review is “on the basis of the envelope that was set at the budget”, adding: “The OBR forecast will come in March which will then give us the latest set of information which we will work to with departments.”

Shadow chancellor said Treasury minister Darren Jones had delivered a “slightly anxious and breathless” response to the urgent question, adding: “Where is the Chancellor? It is a bitter regret that at this difficult time with these serious issues she herself is nowhere to be seen.

“In the last 48 hours borrowing costs have reached a 27-year high and it is the Chancellor’s decisions that have led us here. Before the election (Rachel Reeves) promised that Labour would get debt falling, they would not fiddle the figures, they would not raise taxes and they would grow the economy, but the economy is now flatlining.

“Survey after survey is showing business confidence has simply evaporated and at the budget the Chancellor hiked up taxes, increased borrowing by an average of £32billion-a-year across the forecast and conveniently adjusted her fiscal rules to allow her to do it.

“Higher debt and lower growth are understandably now causing real concerns among the public, amongst businesses and in the markets. And despite what (Mr Jones) says about international factors, the premium on our borrowing costs compared to German bonds recently hit its highest level since 1990.”

He added: “With these rising costs, regrettably the Government may now be on course to breach their fiscal rules and the Chancellor has committed to no further tax rises, so does (Mr Jones) stand by her commitment not to increase taxes even further and, if so, does this mean that the public should expect cuts to public service spending if the OBR judge her fiscal headroom has evaporated?”

Chancellor Ms Reeves has a long-planned trip to China scheduled for this week.

Oliver Faizallah, head of fixed income research at wealth management company Charles Stanley, said: “We are potentially looking at a stagflationary environment (higher inflation and poor growth) or a recessionary environment (growth falling to such an extent that inflation drops as well) in the UK.”

He noted that the market will continue to pay close attention to the data, with the Consumer Price Index (CPI) inflation report released next week being “very closely watched”.

He said: “Within this CPI print, markets will be looking at services inflation, which has potential to edge higher on the back of an increase in national living wage. There is also the view that a higher living wage may result in a drop in hiring, higher unemployment and a subsequent drop in consumer confidence and inflation.

“Gilt yields at levels seen this morning look oversold, and there is still strong demand for both UK and US government bonds. This week we had the UK-5-year and US-30-year auctions, with high bids to cover ratios 3x and 2.5x respectively and yields slightly below market rate at time of bidding.”

Responding to a question on borrowing costs from shadow chancellor Mel Stride, Treasury minister Darren Jones told the Commons: “Financial markets are always evolving as the shadow chancellor knows so it is a long-standing convention that the Government does not comment on specific financial market movements and I will not be breaking that convention today.

“Financial market movements, including changes in Government bond or gilt yields, which represent the Government’s borrowing costs, are determined by a wide range of international and domestic factors.

“It is normal for the price and yields of gilts to vary when there are wider movements in global financial markets, including in response to economic data.

“In recent months, movement in financial markets has been largely driven by data and global geopolitical events, which is to be expected, as markets adjust to new information.”

Conservative MPs had shouted “where is she” in reference to Chancellor Rachel Reeves as the urgent question was directed at her, but Mr Jones was sent by the Government to respond.

The pound’s decline draws an “uncomfortable parallel” to Liz Truss’s disastrous 2022 mini-budget, an analyst has said.

Nikos Tzabouras, senior financial writer at Tradu, commented: “UK economic gloom prevails and the outlook for 2025 is bleak. High inflation and rising wages are keeping the Bank of England from pursuing aggressive easing, yet the currency finds little comfort in this restraint.

“Meanwhile, the government’s higher tax and higher borrowing budget has soured market sentiment and eroded business confidence, compounding the nation’s economic challenges.”

He added: “The pound’s decline, coinciding with soaring borrowing costs, draws uncomfortable parallels to the 2022 mini-budget debacle.”

Kathleen Brooks, research director at XTB, said while still under pressure, the pace of the “relentless” bond sell-off had eased on Thursday.

However, she stressed the pound’s reaction shows ongoing concerns in the market.

She said: “The UK’s fiscal position continues to look perilous.

“The Chancellor is expected to make a speech in the coming days, where she may focus on public sector spending cuts rather than further tax increases to meet her fiscal rules.

“However, the rhetoric from the Labour government is one reason we are in this mess in the first place, and there are no guarantees that Reeves will be able to calm the market.”

Economists have warned Chancellor Rachel Reeves could be forced into further tax hikes or cuts to spending plans to meet UK fiscal rules after the jump in government borrowing costs.

The rise in the cost of servicing government debts could cut into Labour’s expected financial headroom in a potentially worrying sign of how investors see fiscal sustainability in the UK.

The gilt rout has been sparked by investor worries over rising government borrowing and the mounting threat of so-called stagflation, where the economy sees rising inflation combined with stalling growth.

After the autumn Budget, Ms Reeves was left with only £9.9billion of headroom to meet her revised fiscal rules. This came despite a £40billion package of tax increases to fuel higher spending.

Higher debt interest costs may mean the Chancellor would need to trim spending plans or bring in more revenue than expected to meet the fiscal rules.

The Chancellor committed last year to having only one fiscal tax-changing event a year, which is expected in the autumn, leaving many to expect that she will opt to rein in spending plans in her March fiscal statement.

Sterling dropped nearly 1% on Thursday morning, reaching just under $1.23 – its weakest since November 2023 – amid a sharp sell-off in UK government bonds, known as gilts.

Yields on 10-year gilts, which reflect the cost of government borrowing, climbed by eight basis points to 4.89%, marking their highest level since 2008.

The cost of longer-term borrowing also continued to rise, with the yield of 30-year gilts at their highest level since 1998.

They were up around three basis points to a peak of 5.39%.

The rise in gilt yields has an inverse effect on the price of these government bonds, which are falling as a result, with some saying the current market woes echo those seen in the fallout from the disastrous mini-budget of former prime minister Liz truss in 2022.