In the complex world of finance, sometimes economic indicators like ‘gilt yields’ make an unexpected headline. iNews looked at what this means and more importantly, how it affects the prospects for tax cuts in the near future.
Unravelling Gilt Yields and Bonds
At their core, ‘gilts’ and ‘bonds’ are loans that investors make to governments. These funds allow governments to manage their borrowing. Now, the term ‘gilt yield’ refers to the interest on these government loans. Recently, the yields on these gilts have risen significantly in the United Kingdom, reaching their highest level since 1998. A similar trend is also noticeable in US bond markets, caught amidst a selling frenzy.
This rise in gilt yields has surpassed even the levels observed following the mini-Budget crisis. This increase has largely been driven by expectations of interest rates remaining high for longer, as it becomes clear that inflation will continue to shape the financial landscape of the US and UK. This is prompting investors to search for greener pastures, pushing bond prices down and enhancing their yields or returns.
Tax Cuts: Less Likely in Light of Climbing Gilt Yields
The crucial question then is, what does all this mean for the common man? A direct implication of this scenario is that the likelihood of tax reductions before the next general election reduces. To put it simply, higher gilt yields indicate that the Government will likely end up spending more to repay its debts, leaving less room to compensate for the revenue earned through taxes.
Reports of possible tax cuts have been making rounds recently, hinting at a potential reduction or complete abolition of inheritance tax ahead of the expected general elections in autumn. However, with the recent movements in gilts and yields, such cuts appear increasingly unlikely.
The Recent Context: Major Tax Increase in Perspective
It’s important to understand that the UK has previously witnessed one of the largest tax rises in at least half a century. Over the past four years, personal tax thresholds have been frozen. This freeze was introduced in last year’s Budget and is anticipated to generate an additional £40bn annually by the time it is implemented in full by the 2027-28 financial year, as per the Resolution Foundation’s analysis.
Expert Opinions: Concerns for the UK Economy
John Maloney, an economics professor at Exeter University, stated that governments managing large deficits usually aim to reduce them, making pre-election tax cuts in the UK even less probable.
Moreover, voicing genuine concerns regarding the UK’s economic landscape, Stephen Yiu, the lead manager of the Blue Whale Growth Fund, noted how the UK is already spending over £100bn on debt service. Rising gilt yields and persistently high-interest rates will only cause this figure to inflate. Yiu also touched upon shaky finances due to a weak sterling. Possible downgrading of the UK’s debt and diminishing government flexibility struck a nerve: tightening spending and reducing taxation is not an option. Instead, he suggested that a tax increase might be inevitable despite its unpopularity and potential adverse impact on the economy.
Echoing his concern, Bank of England’s former monetary policy committee member Martin Weale pointed out that high yields do curtail spending capacity for other areas and it certainly has future implications, including a potential hike in taxation.
As yields continue to climb, markets are recognising that interest rates set by central banks will probably stay high for longer than previously envisaged. The Bank of England is not expected to reduce its base rate until at least next summer. So, the everyday life of ordinary UK citizens could get affected by these financial nuances, tied up in lofty terms like ‘gilt yields’.