Rachel Reeves has a problem, and now it’s bigger than the one she inherited as chancellor.
UK borrowing costs have been rising since the Chancellor’s autumn budget and 30-year bond yields have reached their highest level in 27 years.
Reeves and Sir Keir Starmer squandered the optimism with which they were blessed by a change of government, strangely opting for miserabilism.
They talked about a supposed £22bn black hole and criticized the economy, then implemented a series of anti-growth tax rises.
Meanwhile, we live in a country where public services are a disaster and after years of underinvestment, we can often feel like nothing is working properly.
Simply put, we can’t fix Britain and deliver the improvements and support we need for future growth because we don’t have the money and we need to borrow to fund it.
It is not a good time for international investors to do that, as Britain is far from the only nation with this problem, and the problem is compounded by the UK’s self-inflicted dent in business confidence and of the market.
In that context, it is not surprising that the UK’s borrowing costs have increased. (Read our guide to bond yields and why they have risen.)
Ten-year bond yields are at 4.8 percent, compared with 3.8 percent a year ago. Meanwhile, the 30-year bond yield that grabbed headlines in recent days is 5.36 percent, compared with 4.42 percent a year ago.
Not all of this is Reeves and Starmer’s fault. Part of this is due to a readjustment of global interest rate expectations, potentially swinging the pendulum too far.
But Labour’s Pessimistic Twins are to blame for some of it: belittling the economy, crashing confidence and then raising taxes on investors, businesses, jobs and wealth was a foolish tactic.
Rising borrowing costs are particularly unfortunate considering Labour’s relentless attacks on the Conservatives over Liz Truss causing bond yields to soar.
It’s worth noting that this is not the same scenario (bond yields have been rising steadily rather than skyrocketing) and that Truss and Kwasi Kwarteng’s bogus mini-budget was definitely not a success.
Too much was revealed in one reckless and unfunded swipe, the measures were produced without OBR costs, Kwarteng overshadowed his own income tax cut for everyone with a tax cut for top earners, and they failed to take into account the unrest that could be unleashed in the bond market by investments in pension funds that are too smart for their own good.
The list doesn’t end there and our current situation was also triggered by Jeremy Hunt’s hilarious police act after the mini-Budget, when as Chancellor he not only reversed tax cuts but increased them and further skewed Great Britain’s warped tax system. Brittany.
However, the calamitous end to the Truss-Kwarteng bet does not mean they were completely wrong.
They identified the UK’s persistently low growth as a problem and wanted us to radically change our thinking enough to lift Britain out of its slump and get the economy into escape velocity.
Reeves and Starmer largely agree with that; Labour’s manifesto and campaign had a similar sentiment focused on growth.
The Gloom Twins: Sir Keir Starmer and Rachel Reeves, who have redoubled their commitment to miserabilism, belittle the economy and talk about our problems, have turned against it
The problem is that everything is very good promising growth, but once in power, reality hits us: we need to speculate to accumulate, but we do not have the capital to do so.
The alternative is to borrow, but we already have huge debt and investors want higher rates to lend to us, further hampering the UK’s finances.
This is something the IFS’s Paul Johnson has referred to as a “fiscal doom loop”.
He says: “The problem is that with high debt, higher interest rates and low growth we run the risk of getting stuck in a rut or “doom loop.”
Except it’s not entirely true to say we don’t have the capital to get Britain back on track.
The government represents the UK and its people and some of those people have a lot of money.
The FCA estimates that total cash savings in the UK are around £1.5 trillion. Some of that will be much-needed rainy day funds and other short-term savings, but the FCA has also identified a large amount of money sitting in low-rate accounts and a good chunk could be invested instead.
British retired investors also collectively have a large amount in their pension funds, which are needed to fund retirement.
Retired cash savers and pension investors tend to be quite cautious. They want good returns, but they also value that they are reliable and come from a low-risk source.
Perhaps the answer to unlocking the UK’s growth puzzle is to offer it to them.
The government could launch Back Britain bonds, offered to ordinary savers and investors.
Sold in a way that is easier to access and understand than gilts, these would be long-term bonds, 10, 20 or 30 years, that would pay a guaranteed rate of return with your money back at the end, or perhaps upon death. .
In this way they would differ from fixed savings accounts, which usually have a maximum duration of between one and five years.
They would also differ from annuities, which pay an income for life but at the end the amount invested disappears.
The rate on Back Britain bonds could therefore be lower and should therefore not torpedo the annuity market, but rather add additional options for retirement savers who crave a stable, guaranteed income.
A plan like this would allow us to avoid fickle international investors and tap into the deep pool of very patient capital represented by UK cash savers and retirement investors.
It would also be a possible solution to one of the problems facing the UK economy: how to unlock the substantial wealth of the British people and put it to productive use.
Instead of paying institutional and international investors to take on debt, we would pay interest to our own savers and investors, who would welcome a gilt-like return and provide a much more stable investment base.
The money could then be set aside in a way that ensures it is not used for day-to-day spending needs, but only to materially improve Britain in a way that constitutes an investment in our future.
This investment would, in turn, boost the economy and improve our finances, while hopefully also making a second round profit as savers and retired investors would spend some of the income they earned from their Back Britain bonds .
There is a small risk that the markets won’t like it, but we have spent too much time fearing doing the right thing for the UK’s long-term future because of concerns about that.
Tapping into your own nation’s savings to improve things doesn’t seem like a far-fetched plan, and in the long run, investors are much more likely to back a country that emerges from the crisis.
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