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The UK government is rolling out new growth initiatives in an effort to avoid “damaging” tax hikes after a punishing week in markets that threatened to unravel its policy agenda.

Borrowing costs in the UK rose near a 16-year high on Friday, which closed the worst week of the year for the gilt market after a sell-off dragged down the pound and left the government scrambling to reassure state investors of public finances.

As Rachel Reeves returns from a trip to China on Monday, the chancellor plans to set out a convincing “growth narrative”, including new economic policies, with a set-piece speech expected later this month, according to officials.

Officials said the government was determined to avoid further tax rises on top of the £40bn package it set out in October, with one saying “it would be an absolute disaster”.

Instead, the government is looking for growth and to prevent public spending that follows a disastrous surge in government borrowing costs.

Officials and ministers are preparing for potential cuts to the department’s spending plans in the upcoming spending review that, according to people familiar with the process, will be held on June 11.

As part of its pro-growth agenda, Labor plans to change the “write-round” process where different departments agree to collectively make policy.

“Departments will be asked if the policy has a beneficial impact on growth and if the answer is yes then we will do it – as a broad principle,” said a Treasury official.

At the same time, departments will also be given a strong message during the spending review process that if they push policies that are a “drag on growth” then they need to be “reversed”.

But economists warned that the gilt market sell-off exposed serious weaknesses in the party’s strategy for the economy and public finances, criticizing the government for failing to build enough margin for bad debts. change in its October Budget, and because of the slowness of detail. growth initiatives.

“They now need to show that they are serious about solving the UK’s fiscal challenges at a higher global rate,” said Ben Nabarro, UK economist at Citigroup. “That means solving weak structural growth. But they are also probably wrong if they think that growth alone will bail them out of this fiscal hole. Some spending and tax reform are also needed.”

The Bank of England said the economy failed to grow in the last quarter of 2024, following weaker-than-expected GDP readings late last year. Business surveys reveal a loss of confidence after the tax hike in the October Budget.

The 10-year gilt yield ended the week at 4.85 percent, up 0.25 percentage points from a week earlier, while sterling fell below $1.219its weakest level against the dollar since November 2023. Shares in the domestically targeted FTSE 250 index fell 4 percent this week, the biggest decline since June 2023.

Reeves’ October Budget, which included a sharp increase in borrowing, fell victim to a sharp sell-off in global bond markets due to renewed fears of inflation.

That dragged government yields higher everywhere as investors bet that central banks will be slower to cut interest rates. This is compounded by investor anxiety over the UK economy to push the country’s 30-year borrowing costs to their highest this century.

“The more yields rise, the worse the financial situation,” said Mark Dowding, chief investment officer for fixed income at RBC Bluebay Asset Management.

Strong US job numbers added to the pressure on the bond market on Friday, prompting traders to bet on a slower pace of interest rate cuts from the Federal Reserve. The next key moment for gilts will be next week’s UK inflation figures.

One area where Reeves will emphasize major reforms is setting out new details of a new “planning and infrastructure bill” which is due to be introduced in the House of Commons in March and aims to speed up to progress.

A senior Labor MP said: “The government really needs to push forward with a development plan…

Another Labor veteran said the recent poll which put Labor at a record low of 24 per cent made him want to “bang my head on a table”, although they said the leadership Starmer’s probably safe for at least a year. “If Labor starts to look as if they don’t have a coherent or even credible narrative to sell the markets then they will be doomed, won’t they?”

Data visualization by Keith Fray