In its Spring Statement, the UK Government claimed that faster growth in tax revenues had given it headroom to cut taxes and assist households and businesses, to counter rising fuel (and food) costs.
And yet, Gilt yields are rising quickly. The 30-year yield jumped 21 basis points last week to 2.38%, the highest yield since January 28th, 2016. With an economy operating at full employment and well below its NAIRU, spending cuts and higher tax rates are more than overdue.
The decision of the UK Government to ease the strain of higher fuel costs with a windfall tax and more borrowing, was politically weak. It has certainly unnerved Gilt investors.
By the Government’s own admission, cyclically-adjusted net public sector borrowing will be 4.4% of GDP this year. The cyclically-adjusted current budget will also be in deficit, by 2.1% of GDP. Neither are consistent with inflation so far above target. The Bank of England may be reluctant to deliver any kind of rebuke to the Government: but that increases the risks of a much steeper yield curve. The differential between 30- and 2-year yields could rise by over 100 basis points in the coming months.
