Sometimes Clever People Say Really Stupid Things
Last week, Andy Burnham, mayor of Manchester and aspiring Prime Minister, proposed that Labour should borrow an extra £40 billion to spend on building council houses, large-scale nationalisation, and the like. “We’ve got to get beyond this thing of being in hock to the bond markets,” he said.
The curious thing — and this is why it was so misguided — is that he didn’t seem to realise that if a government wants to borrow more money, that puts it even more deeply in hock to the bond markets. After all, that is where it gets the money from.
It should be of little surprise, then, that the mere fact he said this caused the market for gilts (UK government bonds) to react, with the ten-year yield rising above 4.75% in trading on Friday.
This government already has to pay a higher rate of interest to fund the national debt than any other G7 country. That premium first emerged under Liz Truss in 2022, when she proposed increasing borrowing. It has risen sharply since Labour took office. Now, the possibility of a Burnham government is pushing it up even further.
This might not matter so much if public finances were running on target. But they are not. In the first five months of this financial year, the government borrowed £15 billion more than the Office for Budget Responsibility forecast in March.
Simon French, an economist at investment bank Panmure Lilburn, reckons it will take an extra £28 billion of tax rises and/or spending cuts in the forthcoming Budget to get the government’s finances back on track.
That feels about right. The mix will be up to Rachel Reeves, but French points out that if the Chancellor tries to pile it all on taxes without making any cuts in spending, that would be badly received by the markets.
The further concern is that we are becoming an outlier on inflation, with by far the highest rate of the G7. The August figures showed inflation at 3.8% on the Consumer Prices Index (CPI), 4.1% on the CPI including owner-occupied housing costs, and 4.6% on the Retail Price Index (RPI). These are widely expected to rise further when the September data comes out next month.
By comparison, inflation is just 0.8% in France and 2.9% in the US.
This isn’t just an issue for Reeves, or the bond markets, or the Bank of England — it’s an issue for all of us.
It has taken a few months to feed through, but it is now clear that last year’s Budget has added significantly to inflation. The rise in employers’ National Insurance Contributions led to some job cuts, especially in the hospitality sector, but mostly firms have paid for it by raising prices.
Add to that the impact of higher minimum wage increases and other government decisions, and the inflation picture becomes even more concerning.
So what’s next?
At the moment, there is not the political will to get the nation’s finances back under control. There will be more tax rises in the Budget, but they won’t raise much revenue, if any. The Tories’ changes to capital gains tax have actually reduced tax receipts, and further hits to non-domiciled taxpayers look set to have the same effect.
As for spending, cuts seem off-limits.
My guess is that there will be more muddling through until there is some sort of crisis — until the bond markets force Reeves or her successor into sharp spending cuts.
As Labour gathers in Liverpool today for its annual conference, history provides another clue.
Back in September 1976, as the UK was seeking an emergency bailout from the International Monetary Fund (IMF), Prime Minister James Callaghan shook delegates at the Labour conference, saying:
“We used to think you could spend your way out of a recession. I tell you in all candour that that option no longer exists, and that insofar as it ever did exist, it only worked by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment.”
The challenge now is not recession and unemployment — at least not yet — but inflation and growth. But the lesson is the same. It was bond markets then that forced ministers to cut spending to get that loan from the IMF.
I do hope we don’t go down that path again.
https://www.thisismoney.co.uk/money/comment/article-15139507/HAMISH-MCRAE-Andy-Burnham-bond-market-blunder.html?ns_mchannel=rss&ns_campaign=1490&ito=1490