AMIDST a crashing pound and the soaring cost of a Labour government that is borrowing billions, Labour Chancellor Rachel Reeves fled to China on Thursday. Her mission was to beg the Stalinist bureaucracy for trade and financial concessions to try to bale out and stave off the complete collapse of the British capitalist economy.
No matter that China, with the second largest global economy was reviled, and sanctioned as a threat to both the UK’s national security and civilisation generally, by both Labour and the previous Tory government. This is an emergency, and the capitalist world economy is imploding.
A toxic cocktail of higher government debt, and massive interest repayments, combined with a collapse of UK capitalist growth, means the Chancellor is now on track to break her fiscal rules by as much as £4.6bn, bringing warnings of more taxes and public spending cuts to come, as demanded by the markets.
Matt Amis, investment director at Abrdn Asset Management, said: ‘We ultimately expect to see a Spring budget alongside the OBR forecasts. She is signalling greater cuts to government spending.’
This would be a massive and humiliating blow to the Chancellor’s credibility after she made a manifesto pledge to hold only one fiscal event a year.
Yields on 30-year government bonds have soared since the Budget, to hit the highest rate recorded since 1998. Yields on 10-year bonds have climbed to the highest seen since 2008.
The pound has slumped to the lowest level against the dollar since November 2023, prompting ‘strategists’ at Citi investment bank to refer to the currency as the ‘Great British peso’, meaning the pound is heading for a complete collapse.
Higher borrowing costs are supposed to strengthen a currency, meaning the fall in the pound is a clear sign that investors are losing faith in the Chancellor’s ability to keep borrowing and keep inflation under control following her Budget measures.
Former Tory Chancellor Philip Hammond described the UK economy and business sentiment as ‘very fragile’, with the pound falling as much as one per cent yesterday, and long-term government borrowing costs hitting highs last seen in 1998.
With Donald Trump becoming US president on 20 January, an attempt to have closer ties with China will further destabilise Britain’s relationship with its closest ally and the money markets. Trump has campaigned to impose tariffs of up to 60 per cent on Chinese goods, and his advisers have since made it clear that Britain will have to pick sides in a global trade war.
Meanwhile, Trump himself is threatening to crush any nation which opposes US interests, either militarily or economically, naming Greenland, Canada and the Panama Canal on his immediate hit-list.
The Labour government needs to announce changes to its financial plans in order to ‘maintain fiscal credibility’, Capital Economics has said.
Paul Dales, chief UK economist at Capital Economics, said: ‘In order to maintain fiscal credibility, the Chancellor will have to announce … lower government spending than currently planned and/or higher taxes.’
Global investors may have lost faith in the UK economy, he added, meaning that the UK could find itself bankrupt and isolated!
Eva Sun-Wai, a fund manager at M&G Investments, told Bloomberg Radio: ‘The worry is that investors have just lost faith in the UK as a place to put their assets.’
She added that – the pound dropping while yields rise may be ‘a signal of capital flight’. Usually, higher yields would be expected to make the pound more attractive, but many capitalists have already prepared for the worst.
Economic pundits like Jeremy Warner of the Telegraph have raised the spectre of 1976, when Labour Chancellor Denis Healy, faced with a gigantic sterling crisis, was forced to turn back from Heathrow airport to beg for a huge IMF loan – on the condition of savage tax increases and deep spending cuts. All aimed at the working class.
Labour’s much trumpeted CPI inflation target of 2.6 per cent has already dwarfed the Office of National Statistics (ONS) core CPI figure of 3.5 per cent, the current bank rate of 4.75 per cent and the average mortgage rate of 5.16 per cent. It is clear that the wreckage of the British economy will be unable to survive the crisis to come. There is only one way forward and that is through building sections of the International Committee of the Fourth International to lead the victory of the World Socialist Revolution and consign capitalism to the dustbin of history!
