The British pound has tumbled to its lowest level in 14 months, amid mounting concerns over economic instability and Chancellor Rachel Reeves’ decision to visit China during a time of domestic economic strain. Sir John Gieve, former Deputy Governor for Financial Stability at the Bank of England, has warned that the government may need to introduce new tax increases or make severe cuts to public services to stabilise the situation.
Economic uncertainty deepens
On Friday, the pound fell sharply by approximately one cent to $1.22, its lowest since November 2023, before a slight recovery. The slump came in response to robust US job figures, exacerbating concerns over Britain’s economic trajectory. Simultaneously, the cost of government borrowing reached worrying levels, with 10-year gilt yields climbing to 4.87%, near post-2008 highs. Yields on 30-year gilts briefly touched 5.43%, slightly below Thursday’s 1998-era peak.
These developments add pressure on Chancellor Reeves, who faces criticism for an October Budget that introduced £40 billion in tax hikes and £30 billion in additional borrowing. The budget aimed to allocate £70 billion to public services, including the struggling NHS. However, concerns are growing about the government’s ability to manage rising borrowing costs, which could further impact mortgages and household finances.
Calls for tough choices
Sir John Gieve highlighted the difficult choices ahead, stating on BBC Radio:
“The choice she is going to face in the Spending Review and then the Budget in the autumn is can I raise borrowing? The increase in interest rates that has happened now, if it continues, will decrease her scope for doing that within her rules. Or do I increase taxes again? Or do I actually institute some very severe reductions and squeezes on public services?”
The Chancellor is reportedly hesitant to introduce further substantial tax increases, especially following criticism of the £25 billion National Insurance hike for employers in the recent Budget.
Reeves’ China visit sparks backlash
As Britain grapples with economic uncertainty, Chancellor Reeves’ visit to China has sparked debate. While the trip aims to strengthen trade ties with the world’s second-largest economy, opposition parties argue that she should remain in the UK to address the growing economic challenges.
Shadow Chancellor Mel Stride accused Reeves of being “missing in action” and blamed the Labour government for “taxing and spending their way into trouble.” Conversely, Culture Secretary Lisa Nandy defended the trip, stating:
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“China is the second-largest economy, and what China does has the biggest impact on people from Stockton to Sunderland, right across the UK. It’s absolutely essential that we have a relationship with them.”
Investor concerns over stagflation
Market analysts have expressed worry about the UK’s economic outlook, with Michael Hewson of MCH Market Insights noting low investor confidence in the government’s economic management. Hewson pointed to Budget measures as a potential reason for the pound’s decline and highlighted growing fears of stagflation—a toxic combination of stagnant economic growth and high inflation.
Public sentiment and political fallout
The rising cost of living and mortgage rates have placed additional strain on households, leading to public dissatisfaction with the government’s handling of the economy. Critics argue that the combination of high borrowing, increased taxes, and Reeves’ absence during a critical period has eroded confidence in the Labour government.
With the autumn Spending Review and Budget looming, Reeves faces mounting pressure to navigate these economic challenges effectively. Her decisions in the coming months will not only impact Britain’s financial stability but also shape the political landscape heading into the next election.
As Britain watches its economic future unfold, the question remains whether the government can stabilise the situation or face further political and economic fallout.
