Andy Haldane, former chief economist at the Bank of England, has cautioned that the current government's fiscal approach resembles a "traditional tax and spend socialist government with better TikTok videos." Haldane, who has advised the Prime Minister on economic matters, stated that bond market investors will continue to increase borrowing costs unless public spending is curtailed.
"The fiscal Achilles' heel of this government, thus far, has been its unwillingness and/or inability to cut public spending," Haldane told LBC. With UK bond yields reaching 28-year highs, he warned that "a few hard choices are looming on the horizon" ahead of the upcoming Budget on October 28.
Haldane was among the economists consulted by the Prime Minister prior to taking office, as the government sought to establish fiscal credibility with financial markets. However, the recent surge in bond yields presents a significant challenge for the Prime Minister and Chancellor John Healey.
With limited fiscal headroom remaining, concerns exist that the government may resort to further tax increases and additional borrowing to balance its accounts. Experts suggest this strategy risks a negative reaction in the bond markets, where the UK already faces higher borrowing costs than other major G7 nations.
Haldane described the situation as becoming "a lot steeper over the past two weeks given what's happened to borrowing costs." He indicated that the initial plan for a "low drama, no drama Budget" has been disrupted by recent events, necessitating difficult decisions for the government.
"A few hard choices so far, but one is looming on the horizon now about how any hole to the Budget headroom is made good on. Is that a question of tax rises, or is it a question of taking the knife to public spending?" Haldane asked.
He acknowledged that spending cuts would likely face strong opposition from Labour MPs but argued that such measures would demonstrate the government's seriousness to the markets. "Any step in that direction would cost you something in political capital, with the backbenchers and beyond possibly," Haldane said. "Ultimately, it's only by taking actions that come with a political cost, that you convince financial markets that you are serious. Within financial markets, we've gone from the cautious optimism of the summer months to the studied scepticism of September."
Haldane elaborated, "The markets now suspect that this is a traditional tax and spend socialist government with better TikTok videos." He suggested that implementing cuts in major spending departments, such as welfare, pensions, or the NHS, or achieving across-the-board productivity improvements in the public sector, could significantly improve the situation.
"Each of those individually would buy you, one, a lot of money, and two even more in instant credibility. That would lower borrowing costs. It would almost pay for itself as a growth dividend," he concluded.