UK is "skating on thin ice" before the Budget, warns Andy Haldane

The UK is "skating on pretty thin ice" ahead of this month's Budget, according to Andy Haldane, the former chief economist of the Bank of England.

Speaking to CNBC on the sidelines of a conference hosted by Goldman Sachs 10,000 Small Businesses UK, Mr Haldane said there were "perils" in the run-up to the Budget, which the Chancellor, John Healey, will deliver on 28 October.

"The truth is we are skating on pretty thin ice in fiscal terms, and nothing would be worse both economically and politically than if the ice were to crack beneath our feet," he said. Asked whether it would crack, he said there was "a risk of that".

"Take the knife to public spending"

Mr Haldane, who sat on the Bank's Monetary Policy Committee until 2021, said the "single most effective way" to avoid trouble would be for the Government to "appease financial markets" by showing it is "able and willing to take the knife to public spending".

"That is the Achilles' heel of this government," he said. "Unless and until action is taken on that, Andy Burnham will remain, alas, in hock to the bond market."

Mr Burnham, who replaced Sir Keir Starmer as Prime Minister over the summer, has previously criticised British fiscal policy as being "in hock" to bond traders.

Why the UK is exposed

Yields on UK government bonds, known as gilts, have risen sharply in recent years, and Britain now has the highest government borrowing costs in the G7. Mr Haldane said international bond markets had created "a hostile environment for all government borrowers", but that the UK was particularly exposed because it is "a leveraged bet on the world economy".

"Our inflation is higher and stickier. Our growth is lower and stickier. We have yet to balance the books this century, so history is not on our side," he said.

Pensions and welfare

Mr Haldane described the Government's push to end the triple lock, under which the state pension rises each year by the highest of inflation, average earnings growth or 2.5 per cent, as "a good first instalment". But he said welfare remains a "totemic issue" for both the Labour Party and the bond market.

What the Chancellor faces

Mr Healey has said he wants to build a fiscal "buffer against uncertainty". He must bring public spending and borrowing under control, with stubborn inflation, high borrowing costs and weak growth adding to the urgency, while the Government has also promised to ease living costs, devolve power to local areas and raise defence spending.

The Prime Minister has refused to rule out tax rises, and newspapers have reported that a windfall tax on banks could be considered. Banks have lobbied against the idea. Mr Haldane warned against targeting business, saying "the great engine of growth is the private sector".

Why gilts matter to households

When gilt yields rise, the Government pays more to borrow, leaving less money for public services. Higher yields also tend to push up the fixed mortgage rates that banks offer, because lenders price their deals partly on what it costs them to borrow over two and five years. That is why the reaction of bond markets to the Budget will matter to homeowners and first-time buyers in Birmingham, as well as to the Treasury.