Sir Keir Starmer\u2019s reshuffle has sparked uncertainty on the markets – Simon Dawson \/Crown <\/p>\n
Lord O\u2019Neill, the former Treasury minister and City grandee, has fired a warning shot over the state of the bond market<\/a> as Britain\u2019s borrowing costs surged to a 27-year high.<\/p>\n The ex-Goldman Sachs chief economist said he was \u201cbothered\u201d by the rising cost of UK gilts, adding that Rachel Reeves must tackle the ballooning benefits bill at her Budget this autumn in order to resolve Britain\u2019s fiscal crisis.<\/p>\n<\/p>\n His comments came as the pound fell sharply on Tuesday and UK borrowing costs surged to hit their highest level since 1998 after Sir Keir Starmer sidelined the Chancellor in a No 10 reshuffle.<\/p>\n Figures from the Office for Budget Responsibility suggest the increased cost of gilts, if maintained, could add \u00a36bn to the Government\u2019s interest payments by the end of the decade.<\/p>\n Lord O\u2019Neill said there had been \u201ca slow drip, drip, drip to further deterioration\u201d in the bond market \u201cwhich is not a good sign\u201d.<\/p>\n He added that financial markets were now waiting for action from the Government after they capitulated to Left-wing Labour backbenchers in July over curbs to welfare spending.<\/p>\n Lord O\u2019Neill told BBC Radio 4\u2019s PM programme: \u201cEver since the climbdown on welfare reform I\u2019ve been watching the markets more closely. As the summer\u2019s gone on I\u2019ve got more bothered.<\/p>\n \u201cOn days where US and German bond yields go down, ours don\u2019t go down as much. On days where theirs go up, ours tend to go up more than theirs.<\/p>\n \u201cThere are three or four really big things which have to be tackled if we\u2019re going to solve our fiscal challenges. I would put into that the triple lock, the property market, welfare reform and much more focus on getting better productivity and returns out of how much money we keep piling into the NHS.<\/p>\n \u201cI think they\u2019re quite focused on the latter, but the other three we just don\u2019t really know. I think the markets are at the point where something needs to happen on that big stuff.\u201d<\/p>\n The crossbench peer\u2019s comments are expected to carry weight across party lines as he became one of the world\u2019s best-known economists after coining the widely adopted term Brics to refer to rising economic powers including Brazil, Russia, India and China.<\/p>\n The pound was the worst performer among the world\u2019s major currencies on Tuesday, dropping by as much 1.5pc against the dollar to around $1.33 and 0.6pc against the euro to \u20ac1.15.<\/p>\n The yield on 30-year UK gilts \u2013 a benchmark for the cost of servicing Britain\u2019s national debt \u2013 climbed 0.05 percentage points to 5.69pc, while gold rose to a record high to $3,528 an ounce, as investors fled to safe haven assets.<\/p>\n While borrowing costs are rising around the world, it is unusual for a currency to weaken at the same time.<\/p>\n Story Continues <\/p>\n The market moves increase the pressure on Sir Keir Starmer and Ms Reeves ahead of this autumn\u2019s make-or-break Budget<\/a>.<\/p>\n Economists have warned that Ms Reeves faces a fiscal black hole of as much as \u00a350bn<\/a> in the autumn. Meanwhile, growth remains weak.<\/p>\n While borrowing costs are high, the appetite for UK government debt remains strong. The Treasury was on Tuesday poised to raise a record-breaking \u00a314bn through the sale of 10-year gilts after attracting significant interest from investors.<\/p>\n It suggests investors still see UK debt as attractive despite the country\u2019s fiscal woes, as rivals on the continent like France are gripped by their own crises.<\/p>\n Chris Beauchamp, the chief analyst at stockbroker IG, said rising borrowing costs \u201ccomplicate matters enormously for the Government, in turn signalling that tax rises are coming in the autumn Budget\u201d.<\/p>\n