Baroness Neville-Rolfe
To ask His Majesty’s Government what assessment they have made of the recent rise in gilt yields, and what contingency plans they have in place to manage any further rise.
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, as is long-standing convention, the Government do not comment on specific financial market movements. Gilt yields are determined by a wide range of international and domestic factors. The Government are committed to economic stability and sound public finances. The fiscal rules are non-negotiable and economic growth is our number one priority.
Baroness Neville-Rolfe (Con)
The noble Lord is generally dismissive of criticism of economic policy, but the bond markets do not lie and their current verdict is crushing, with borrowing rates at a 27-year high. Sterling also slid this morning. Will the Government even now change course, adopt measures that really support growth and drop policies that destroy growth, such as the Employment Rights Bill and the destruction of the North Sea oil and gas industries?
Lord Livermore (Lab)
I am grateful to the noble Baroness for her question. As she will know, recent gilt yield movements have risen in line with global peers, mainly driven by global factors. The recent gilt market moves have also been orderly. As she knows, our commitment to the fiscal rules is non-negotiable and we have a clear plan in place to put the public finances on a sustainable path and prioritise investment to support long-term growth. She talks about the position of the UK economy; she knows that this is an uncertain and volatile global economy, but even so the UK remains resilient and is outperforming our peers. The UK was the fastest-growing economy in the G7 in the first half of this year and our commitment to stability is paying off, creating space for the Bank of England to cut interest rates five times since the election, with business confidence now at its highest level for 12 months.
Lord Macpherson of Earl’s Court (CB)
My Lords, the Financial Secretary is right to point out that yields on German bunds have risen almost as much as yields on gilts in the UK over the last month, but does he recognise the importance of ensuring that the UK’s economic policy does not stand out from other medium-sized countries in Europe? To that end, can he reaffirm the Government’s commitment to their fiscal rules in particular and to sound money in general?
Lord Livermore (Lab)
I am grateful to the noble Lord for his question. I am happy to reconfirm that; our commitment to the fiscal rules is non-negotiable. The Government have a clear plan in place to put the public finances on a sustainable path and prioritise investment to support long-term growth. At the Spring Statement, the OBR forecast that borrowing would fall in every single year of the forecast, from 4.8% of GDP to 2.1% of GDP in 2029-30.
The noble Lord also said it is important that our economic policy does not stand out from our peers. One area in which we did stand out when this Government came to office was in historically low levels of investment in our economy, which constrained growth. We had the lowest levels of investment in the G7, which is something that our fiscal rules seek to rectify.
Baroness Kramer (LD)
My Lords, there is a global glut of sovereign debt as Governments across the globe keep borrowing, but among the G7 it is the UK that has had to raise its yields the most. To aggravate our situation, the wind-down of defined benefit pension schemes leaves us dependent on volatile domestic retail and overseas buyers. What is the Government’s immediate strategy to bring down yields and, more fundamentally, build a sustainable gilts market—and would sterling stablecoin contribute to this?
Lord Livermore (Lab)
I am grateful to the noble Baroness for her question. As I have said, recent gilt yields have risen in line with global peers, mainly driven by global factors. Recent gilt market moves have been orderly; the gilt market is deep and liquid, with a good track record in responding smoothly to volatility in levels of gilt supply. Underlying demand for the UK’s debt remains strong, with a well-diversified investor base. It is most important that I stress that our commitment to the fiscal rules is non-negotiable and we have put the public finances on a sustainable path.
Lord Watts (Lab)
My Lords, can the Minister remind the House what the bond market thought of the previous Government’s economic policy, especially the Truss element of it?
Lord Livermore (Lab)
My noble friend is obviously right to draw attention to the previous Government’s disastrous economic policies. He knows that, as I have said, the Government do not comment on specific financial market moves, but he will also know that current conditions in gilt markets are completely different from those experienced at the time of the Liz Truss mini-Budget. Then, severe volatility in gilt yields caused instability in the pension fund sector and dysfunction in gilt markets. This led the Bank of England to have to intervene on financial stability grounds to restore market functioning. Recently, gilt yields have risen in line with global peers, mainly driven by global factors, and these market moves have been orderly.
As my noble friend draws attention to, when Liz Truss crashed the economy, long-dated bonds were most significantly impacted due to market dysfunction caused by unfunded tax cuts, unrealistic spending plans and the undermining of institutions that are crucial to economic stability, namely the Treasury, the OBR and the Bank of England. This pushed up mortgage costs by £300 a month, for which working people are still paying the price.
Lord Howell of Guildford (Con)
My Lords, bond markets obviously charge for their lending to certain countries, on the basis of differing judgments on the health of the borrower, on the prospects and on the signs of coherent strategy and direction. Could we interpret the movement of the Chief Secretary to the Treasury over to a new role, senior Minister inside Downing Street under the Prime Minister, as a first step—an attempt—to recreate a coherent strategy, which is so obviously lacking?
Lord Livermore (Lab)
I disagree with the noble Lord’s interpretation of this Government’s strategy. We have a very clear strategy to grow the economy and maintain fiscal stability. It is incredibly welcome that my right honourable friend is now working inside No. 10 and will help to drive forward the Government’s agenda.
Lord Hunt of Kings Heath (Lab)
My Lords, will my noble friend respond to the comment of the noble Baroness, Lady Neville-Rolfe, about North Sea oil and gas? Will he remind her of the CBI report in spring this year, which showed that in the previous year the green economy had grown by nearly 10%, as opposed to the pathetic growth figure that the last Government produced overall?
Lord Livermore (Lab)
My noble friend says it much better than I can. I agree wholeheartedly with what he says. Of course it is important that we grow the green economy, but we must also make sure that we grow the whole economy as well.
Baroness Bowles of Berkhamsted (LD)
My Lords, can the Minister explain what the high level of bond yield means for those renewing fixed-rate mortgages, given that those are determined more by bond yields, albeit at the shorter end, than by base rates? At the moment, the disconnect is creeping towards the shorter rates too.
Lord Livermore (Lab)
As the noble Baroness knows, the Government do not comment on specific financial market movements, but it is very clear that we have created space for the Bank of England to cut interest rates five times since the election. That will absolutely help those people taking out a mortgage.
Lord Hodgson of Astley Abbotts (Con)
My Lords, in his reply to my noble friend Lady Neville-Rolfe, the Minister did not refer to the question of index-linked gilts. Will he confirm to the House that 30% of the gilts outstanding are index linked, and that therefore this country is inevitably now much more vulnerable to swings in interest rates?
Lord Livermore (Lab)
As I have said before, the Government do not comment on specific financial market movements.
Lord Sikka (Lab)
My Lords, can the Minister confirm that the yield rise does not affect the cost of servicing the debt already in place, including £2.71 trillion of debt inherited from the previous Government?
Lord Livermore (Lab)
I am not sure I entirely follow my noble friend’s question. What I will say is that current global market volatility underlines the centrality of our fiscal rules. We have fiscal rules specifically to give markets confidence that we have a clear path to get borrowing down, and there should be no doubt about the Government’s commitment to economic stability and sound public finances, which is why meeting the fiscal rules is non-negotiable.
Lord Clarke of Nottingham (Con)
My Lords, the recent rise in yields on bonds should serve as a warning that this country is much nearer to the risk of a financial crisis than the Government are even remotely acknowledging. It is not impossible to foresee a trip to the IMF eventually unless the Government can get their fiscal policy under control. They now have a very tough and difficult Budget to introduce, in which they will probably have to take some very unpopular decisions in the short term. Will the Minister assure us that the Government will stop floating various ideas to try them out in the newspapers, will look to raise revenue from the principal taxes that are usually used in these circumstances, which they foolishly ruled out as part of their election manifesto, and will curb and if possible reduce the level of borrowing they are making, and not simply define all borrowing as “investment” to say that it does not damage their fiscal policy? Only that kind of responsible action in the genuine medium and long-term national interest will stop the markets being as nervous as they have been.
Lord Livermore (Lab)
I am grateful to the noble Lord for his question. There was a lot there; let me see if I can cover some of that. He is absolutely right to draw attention to the fact that, as the previous Government found, credibility is hard won but easily lost. That is why ongoing market volatility further underlines the importance of a robust fiscal framework and non-negotiable fiscal rules. I assure him that we will continue to meet our fiscal rules. He talks about reducing borrowing, and we have set out a very clear path to reduce borrowing across this Parliament.
The noble Lord has told me many times that we should raise taxes on working people. We have clearly said that that is not our intention, and we have a manifesto commitment to that effect. I will not give a running commentary now on the fiscal forecast or speculate on the next Budget. As he draws attention to, there has been much speculation in the newspapers, as is usual ahead of a Budget. A lot of that speculation is irresponsible, but I will not comment on individual tax measures now. We will do things in the usual way: the Chancellor will ask the OBR to produce a new forecast in the autumn, she will take decisions based on that forecast and we will set out our fiscal plans at the Budget in the usual way. The Chancellor will do so mindful of the importance of growth and investment to businesses and the economy.