Rachel Reeves is suffering from ‘low credibility’, said Julian Jessop (Image: Getty)
Chancellor Rachel Reeves’ “credibility” is now so low China might be the best place for her, an economist has quipped following criticism of the Chancellor’s trip to Beijing.
Julian Jessop was speaking during a week in which rising government borrowing costs and a declining pound have dominated the agenda.
Political rivals including Shadow Chancellor Mel Stride have argued Ms Reeves’ absence during this period reflects poorly on her commitment to addressing domestic economic issues.
The cost of long-term government borrowing climbed again on Friday, sitting just below the historic highs reached in recent days.
The yield on 30-year gilts briefly touched 5.43%, just below the peak of Thursday’s sell-off, which was the highest point since 1998.
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Speaking on Times Radio this morning, Mr Jessop, Economics Fellow at the Institute of Economic Affairs, said: “I will say in Rachel Reeves defence, that isn’t just entirely her fault.
“If you look at interest rates around the world there, they’re also rising.
“So in the US, in particular, long term government borrowing costs are basically their highest since the global financial crisis of 2008 so. So the UK is certainly not alone, and investors almost everywhere are worried about rising inflation and high government borrowing.”
Nevertheless, the UK was “a bit of an outlier”, Mr Jessop stressed.
Labour PM Sir Keir Starmer (Image: Getty)
He explained: “Our yields have risen much more than those in the rest of Europe, and although they’ve matched those in the US, arguably, they should still be lower, because, of course, the US economy is strong and ours is very weak.
“So I think the UK is being singled out.”
Investors were essentially worried about three things, Mr Jessop argued.
He said: “One is that the additional spending in the budget will push up inflation, and that means the Bank of England won’t cut interest rates as quickly.
“The second is that the tax increases in the Budget will slow growth, which we’re already seeing, and that means they won’t raise as much revenue as expected.
“And finally, of course, there’s going to be a huge increase in borrowing and other things being equal, investors demand higher returns for buying more bonds.
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“So that’s why interest rates have to have to rise. So there’s definitely some UK specific factors in here, as well as the global economic backdrop.”
Asked by host Ed Vaizey what Ms Reeves should do now, Mr Jessop continued: “I don’t think there’s a lot that she can do to reassure the markets in terms of simple words.
“I think, frankly, her credibility in the markets is quite low at the moment. I mean, she, you know, she promised not to raise taxes during the election campaign that went ahead and did that.
“The Budget itself contained lots of surprises, including the big increase in employers’ national insurance, which she rather oddly dismissed as not being a tax of working people.
“I think actually going off to China is probably no bad thing.”
Ms Reeves needed to focus on her “growth agenda”, Mr Jessop suggested, “to try and put all the growth levers that she can”.
Rachel Reeves delivered her Budget in October (Image: Getty)
He added: “Here, I think there are some useful things that can be done. The government has asked regulators to come up with some growth friendly initiatives there.
“The other thing, of course, that might still help her is that it’s still a couple of months before the office for Budget Responsibility actually crunches the numbers, and it’s possible that the turmoil we’re seeing in the bond markets now will be short lived if we if we get some reassuring news from the US, for example, and the global environment improves, that might be enough.
“When the government is thinking about the outlet for the public finances, and in particular the Office of Budget Responsibility, what really matters is what happens between the fourth and the fifth year of the forecast horizon, not necessarily what happens this year.
“We could get quite a bit of bad news over the course of this year, and that doesn’t necessarily require the government to panic and raise taxes further or slash spending.
“But a lot then depends what the markets are anticipating over that period as well, because that’s essentially where the Office of Budget Responsibility gets its interest rate forecasts from.
“So market confidence will have to recover and I think related that, business confidence will have to recover as well, because without growth, the public finances will just worsen further.”