A challenging week for the UK economy has called chancellor Rachel Reeves’ fiscal plans into question, with a sharp rise in government borrowing costs jeopardising public spending and future tax cuts.
The news bodes poorly for UK businesses who have asked for extra financial support entering 2025, as supply chain challenges and US tariff threats raise concerns.
Supply chain struggles
Supply chain problems have been cited by businesses as the biggest challenge they face this year, with a survey carried out by accountancy firm BDO finding that over a quarter (29%) of their 500 mid-sized business respondents were concerned going into 2025.
Firms said that delayed deliveries and inventory shortages were making it difficult to meet customer demand.
Concerns about increasing geopolitical tension and the impact of Trump’s tariff proposals of up to 20% on all imported goods were also cited.
Amid these trade concerns, alongside rising costs, many firms reported that they’ll need additional financial support from government to face these challenges.
BDO partner Richard Austin said that the government must “throw its weight behind these ambitious, resilient, mid-sized businesses”.
“They need a more favourable operating environment, underpinned by policy and taxation, that enables better access to capital and encourages ongoing investment in new technologies.”
However, US tariffs could be a threat to any fiscal relief, with The Times reporting that economists have estimated Trump’s plans would represent a £21bn loss to the UK economy, limiting the government’s tax intake.
Closing fiscal headroom
Rising government borrowing costs have been another blow to Labour’s economic plans, with 10-year borrowing costs reaching 4.28% on Wednesday (8 January) – the highest level since the 2008 financial crisis.
The Financial Times reports that borrowing costs have risen much faster in the UK than in other developed economies, raising concerns that investors lack faith in the government’s growth plans, amid lingering inflation and high borrowing needs.
The pound sank to its lowest level in a year following the bond spike, at £1.226 against the dollar on Thursday.
Speaking to the publication Andrew Pease, chief investment strategist at Russell Investments, highlighted that the bond market reflects “a global sell-off”, but added that this is “being compounded in the UK by the toxic combination of a flatlining economy, sticky inflation and a worsening fiscal outlook”.
Reeves’ budget
The government has sought to reassure the public that it will stand by pledges to only borrow within its means. In a statement released Wednesday, it said:
“No one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances.”
Reeves’ Autumn Budget left a narrow £9.9bn of fiscal headroom, which has been threatened by the rising cost of borrowing.
Since the bond price rise, speculation has increased around whether Reeves will cut public spending or renege on tax cut pledges, with some predicting a Spring Budget that could see an increase in rates.
Tough road ahead
The Times reports that Reeves is looking to new growth strategies in order to avert a disappointing Spring Budget, with Treasury officials asked to draft alternative growth plans and ministers told to “cease anti-growth measures”.
The directives come ahead of a speech later this month, in which she’ll aim to reassure the public and markets that Labour can deliver on growth without breaking fiscal promises.
Some within finance were sceptical that this would be possible, with Kathleen Brooks, research director at trading platform XTB, telling the publication that negativity about the UK’s economic prospects were partly responsible:
“The rhetoric from the Labour government is one reason we are in this mess in the first place, and there are no guarantees that Reeves will be able to calm the market.”
