Rather, the Treasury’s choices shape and are shaped by the choices of both bond investors and the Bank of England. The latter is often left out of the discussion of bond market power despite its influence, both because its decisions about buying and selling government bonds affect yields, and because overall interest rates can raise or lower the cost of borrowing.
These choices the Bank of England makes are political, not in the sense that they are made by politicians, but that they are not made according to ironclad economic rules. Even the relationship between interest rates and the inflation target is not set in stone.
It has been a choice, in this country, to rely heavily on monetary policy to fight inflation instead of a broader policy toolkit including price controls, intervening in supply chains, and tackling concentrated market power, all of which do more to tackle the root causes of price rises. This is one way in which the government might have more control than it lets on in the face of the bond market.
This is not to deny that bond traders have some power, just as pointing out that Reeves’ fiscal rules – designed to ensure that, within five years, all day-to-day spending is financed through revenues from taxes, not borrowing, and net that public financial debt as a share of GDP is falling – are self-imposed does not mean there are no real constraints on government borrowing.
But the government has done itself no favours by creating a fiscal framework that actually leads to more uncertainty, not less. It is highly sensitive to small changes in the economic forecast, leaving ministers scrambling to find additional tax rises or spending cuts – “efficiencies”, as Reeves calls them – to keep within these constraints.
The chancellor made much of having increased her “headroom” (the margin with which she is meeting the fiscal rules around borrowing) to £22bn, which is £12bn more than the headroom forecast in March. But the Office for Budget Responsibility cautioned in its autumn forecast that with so much uncertainty around the actual path of the economy in future years, this margin for error is small.
Being panicked and reactive rather than patient and strategic is a common thread through Labour’s economic policy since taking office last year, a symptom of its lack of serious diagnosis of the UK’s economic problems and vision for transformation.
