UK borrowing costs climb ahead of the budget; Water companies to pay £157.6m penalty for poor performance – business live
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UK borrowing costs have been climbing in recent days as investors have braced for the budget in a little over three week’s time.
Traders have been selling UK bonds, known as gilts, which pushes up the yield (or date of return) on the debt.
As a result, the gap between UK and German borrowing costs has now reached its widest since summer 2023, and is appproaching the levels seen during the mini-budget panic of 2022…. as this chart shows:
A chart showing the premium on 10-year gilt yields over German bunds Illustration: LSEG
The yield on 10-year UK government gilts has now risen to 4.2%, its highest level since the general election three months ago.
Notably, that’s higher than the US – which pays around 4% to borrow for a decade – as well as Germany, where 10-year bunds yield just 2.2%.
Rising borrowing costs reduce the amount of headroom the government has to tweak tax and spending plans while still meeting its fiscal rules – to have debt falling in five-years time, and to balance day-to-day expenditure with tax receipts.
The City is anticipating that chancellor Rachel Reeves may adjust the UK’s fiscal rules, to give herself more headroom to fund investment projects. Such a move could lead to higher government borrowing than expected
Reeves must decide by Wednesday whether to do this, and potentially unlock up to £57bn in additional spending on infrastructure at this month’s budget.
Kathleen Brooks, research director at XTB, says “speculation is rising” that Reeves could change how the government’s fiscal rules are calculated to allow more spending on housing, roads and hospitals.
She explains:
The Labour government has promised that it would follow the Conservative’s fiscal rule, that public sector net debt should be falling in the fifth year of a forecast period. One way that the Chancellor could achieve this fiscal target at the same time as boosting investment, is to exclude losses on the Bank of England’s stock of bonds accumulated during quantitative easing from the government’s balance sheet. This could give the Chancellor up to £15bn of fiscal headroom.
Other plans being discussed include moving a national wealth fund away from the government’s books, which may also add another £15bn to the Chancellor’s fiscal headroom. The government is looking at ways to publish estimates of how much new capital projects will boost growth and generate money directly for the Treasury, which could also take the focus away from capital spending.
Secretary of State for the Environment, Food and Rural Affairs, Steve Reed, says:
Our waterways should be a source of national pride, but years of pollution and underinvestment have left them in a perilous state.
“The public deserves better. That’s why we are placing water companies under special measures through the Water Bill, which will strengthen regulation including new powers to ban the payment of bonuses for polluting water bosses and bring criminal charges against persistent law breakers.
“We will be carrying out a full review of the water sector to shape further legislation that will fundamentally transform how our entire water system works and clean up our rivers, lakes and seas for good.”
Customer satisfaction has continued to decline for most water companies in 2023-24, Ofwat’s report shows.
Only South West Water – Bristol region improved its customer satisfaction score in 2023-24.
PortsmouthWater, WessexWater and NorthumbrianWater had the highest ratings.
The largest percentage decline in scores between 2022-23 and 2023-24 were for SevernTrentWater, SouthWestWater– South West region and SESWater.
SouthernWater and ThamesWater remain the worst performers for the fourth year in a row.
Several companies cite operational and weather-related issues as reasons for declining performance, Ofwat reports.
A chart showing water company satisfaction ratings Photograph: Ofwat
Ofwat has attempted to put the 17 water companies of England and Wales into three categories – ‘leading’, ‘average’ and ‘lagging behind’.
Depressingly (but not surprisingly), no companies qualify for the ‘leading’ rosette.
Three are lagging behind: AnglianWater, DŵrCymru, and SouthernWater.
Four have been moved from ‘lagging behind’ to ‘average’: ThamesWater, YorkshireWater, SouthWestWater – Bristolregion and SouthEastWater.
Indeed, Ofwat admits it has “serious concerns about Thames Water’s performance despite this single year improvement in position”, which is why it placed the company in a Turnaround Oversight Regime in July.
Here are the key points from Ofwat’s annual report on the English and Welsh water sector:
Poor performance costs water sector £157.6m this year as companies fall further behind on some key Ofwat targets
Customers’ bills will be reduced to reflect these performance penalties in 2025-26, following end of period calculation
Ofwat CEO challenges companies to match record proposed investment with changes in company culture and leadership essential for lasting change
Despite water companies committing to reduce pollution incidents by 30 per cent, there has only been a 2 per cent reduction
Fewer companies categorised as ‘lagging behind’ but performance inconsistent across the sector
Damningly for the water sector, Ofwat reports there was an increase in pollution incidents for nine of the 11 water and wastewater companies in England and Wales in 2023.
Despite the sector committing to reduce pollution incidents by 30% in the 2020-25 period, and achieving a reduction of 15% from 2019 to 2022, the increase in pollution incidents in 2023 means there has now only been a 2% reduction to date.
On leakage, while progress has been made, companies have only achieved a reduction of 6% on an annual basis to date, against a target of 16% by 2025.
It’s a similar story with leaky pipes, Black adds:
On leakage, while progress has been made, companies have only achieved a reduction of 6% on an annual basis to date,1 against a target of 16% by 2025. The sector committed to reduce internal sewer flooding incidents by 41%, but four years in it has achieved a 10% reduction.
Water companies in England and Wales are to pay a £157.6m penalty to customers after missing key targets on reducing pollution, leaks and supply interruptions.
Water regulator Ofwat has announced the move in its annual company performance report, which has also found that customer satisfaction has fallen to its lowest level since the measure was introduced in 2020-21.
Ofwat said the £157.6m rebate will be taken off bills for households and businesses in 2025-26.
Presenting the report, Ofwat chief executive DavidBlack warns that “there has never been a stronger case for a culture change in the water sector.
He says:
No company has made it into our ‘leading’ category for the second year running and progress against key targets, including pollution and internal sewer flooding, is unacceptably slow.
Black adds:
Companies’ failure to comply with responsibilities to deal with wastewater has already led to us proposing enforcement penalties on Thames Water, Yorkshire Water and Northumbrian Water totalling £168 million and investigations into the remaining wastewater companies in England and Wales are ongoing.
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK borrowing costs have been climbing in recent days as investors have braced for the budget in a little over three week’s time.
Traders have been selling UK bonds, known as gilts, which pushes up the yield (or date of return) on the debt.
As a result, the gap between UK and German borrowing costs has now reached its widest since summer 2023, and is appproaching the levels seen during the mini-budget panic of 2022…. as this chart shows:
A chart showing the premium on 10-year gilt yields over German bunds Illustration: LSEG
The yield on 10-year UK government gilts has now risen to 4.2%, its highest level since the general election three months ago.
Notably, that’s higher than the US – which pays around 4% to borrow for a decade – as well as Germany, where 10-year bunds yield just 2.2%.
Rising borrowing costs reduce the amount of headroom the government has to tweak tax and spending plans while still meeting its fiscal rules – to have debt falling in five-years time, and to balance day-to-day expenditure with tax receipts.
The City is anticipating that chancellor Rachel Reeves may adjust the UK’s fiscal rules, to give herself more headroom to fund investment projects. Such a move could lead to higher government borrowing than expected
Reeves must decide by Wednesday whether to do this, and potentially unlock up to £57bn in additional spending on infrastructure at this month’s budget.
Kathleen Brooks, research director at XTB, says “speculation is rising” that Reeves could change how the government’s fiscal rules are calculated to allow more spending on housing, roads and hospitals.
She explains:
The Labour government has promised that it would follow the Conservative’s fiscal rule, that public sector net debt should be falling in the fifth year of a forecast period. One way that the Chancellor could achieve this fiscal target at the same time as boosting investment, is to exclude losses on the Bank of England’s stock of bonds accumulated during quantitative easing from the government’s balance sheet. This could give the Chancellor up to £15bn of fiscal headroom.
Other plans being discussed include moving a national wealth fund away from the government’s books, which may also add another £15bn to the Chancellor’s fiscal headroom. The government is looking at ways to publish estimates of how much new capital projects will boost growth and generate money directly for the Treasury, which could also take the focus away from capital spending.
