Chancellor Rachel Reeves is planning to slash billions of pounds in disability benefits in order to calm Britain’s debts crisis.
Downing Street is said to believe that significant reductions are needed in the welfare budget, namely from personal independence payments (PIP).
Yesterday, the pound fell sharply against the dollar and the Government’s borrowing rates rose to a 27-year high.
There were also warnings that the growing crisis could hit mortgage rates if it continues.
Now, Ms Reeves is said to have made it clear to the Treasury that she wants to get ‘tough’ on spending – meaning cutting areas in unprotected departments – rather than considering new tax rises, the Telegraph reports.
The annual cost of support payments for people with disabilities and health conditions is expected to increase from £22billion to £35billion by 2029.
Meanwhile, former Treasury select committee chairman Harriet Baldwin accused Ms Reeves of ‘fleeing to China’ after the Chancellor flew into Beijing to meet the nation’s communist leaders while Britain’s borrowing costs soared.
She told the Mail: ‘The Chancellor needs to take responsibility for the ongoing ramifications of her Budget choices and return to face Parliament.’
Liberal Democrats leader Ed Davey added: ‘Instead of jetting off to China, the Chancellor should urgently come before the House of Commons to cancel her counter-productive jobs tax and set out a real plan for growth.’
In a highly unusual move, the Treasury issued a public statement on Wednesday reassuring the markets that the Chancellor’s commitment to her fiscal rules was ‘non-negotiable’ and that she would maintain an ‘iron grip’ on the public finances.
Treasury sources said she was drawing up contingency plans for emergency spending cuts if a new forecast by the Office for Budget Responsibility in March shows she is on course to break her own debt rules.
Treasury chief secretary Darren Jones, who took her place in the Commons yesterday, repeated the commitment to the fiscal rules – and suggested spending would be squeezed if borrowing costs forced the public finances off course.
Mr Jones played down the significance of recent market turmoil, saying it was ‘normal for the price and yields of gilts to vary when there are wider movements in global financial markets’.
And he defended the Chancellor’s trip to China, describing it as ‘an important visit for trade and investment in the UK economy’.
On Wednesday, the pound slumped close to $1.22 versus the US dollar, the lowest level since November 2023 – adding to sharp falls the previous day.
One City analyst joked that sterling’s slide suggested it was becoming the ‘Great British peso’.
The yield on the benchmark 10-year UK gilt, which reflects the cost of government borrowing, climbed by roughly 12 basis points to a peak of 4.81%.
It was the highest reading since the 2008 financial crisis.
The rise in gilt yields has an inverse effect on the price of these government bonds, which fell as a result on Wednesday.
Yields on UK ten-year bonds climbed above 4.9 per cent, a fresh 17-year high, while yields on 30-year bonds rose above 5.4 per cent, the highest since 1998.
State borrowing costs also struck it highest levels in the last 17 years amid a continued sell-off in the bond market and investor concerns over the threat of stagflation.
This also contributed to a slump in the value of the pound, which dropped to its lowest level since April last year.
Eva Sun-Wai, a fund manager at M&G Investments, said: ‘The worry is that investors have just lost faith in the UK as a place to put their assets.’
Martin Weale, a respected former member of the Bank of England’s rate-setting monetary policy committee, told Bloomberg News: ‘We haven’t really seen the toxic combination of a sharp fall in sterling and long-term interest rates going up since 1976. That led to the IMF bailout.’
He added: ‘So far we are not in that position but it must be one of the Chancellor’s nightmares.’
Nigel Green, chief executive of financial advisory firm deVere, added: ‘The Chancellor’s inability to reassure markets is fanning fears of an economic implosion, with austerity looming as the only option to restore credibility – a brutal throwback to 1976.’
The warnings are the latest to conjure up the spectre of the 1970s when Britain last suffered a crippling bout of ‘stagflation’, in which rising prices couple with low growth to produce an economic doom loop.
Globally, there has been a wider sell-off in government bonds in recent months in the face of worries that US President-elect Donald Trump could introduce a tariff policy which would be inflationary for many international economies.
US Treasury yields also moved firmly higher on Wednesday, with the 10-year yield rising to 4.69% – its highest since April last year.
It came after reports of resilience in the US economy cast doubts over expectations for further cuts to interest rates.