This crisis has been brewing for years. Now we’re almost there.
Chancellor John Healey is about to run out of headroom at the worst time (Image: Getty)
Under both Labour and the Tories, our national debt has been climbing for decades and is heading for £4trillion. So has the amount of interest we pay. For each £10 the government now spends, £1 goes on debt interest. That doesn’t reduce the amount of money we owe, it’s purely servicing the loan. Labour’s spending spree has only added to that debt, while piling an even bigger burden on taxpayers. We’re on the brink, now that you’d know from listening to Andy Burnham. He just wants to spend more. Fat chance now.
I’ve been banging on about gilt yields for years, but in particular over the last few weeks, as they’ve been inexorably climbing. They’re a barometer of how dangerous our financial position is, and right now it’s at boiling point. Gilt yields measure how much we pay bond investors to persuade them to lend us money. They demand a steady rate of interest and their cash back after a set term. If they fear their money isn’t safe, they’ll demand more interest. And today, they are fearful.
Britain has the highest government bond yields in the entire G7, partly because investors don’t trust our politicians to keep the lid on spending, and partly because of weird decisions by the Bank of England. Today, gilts yields climbed even higher, with 30-year yields hitting 6% for the first time since January 1998. At one point, they touched 6.07%, before retreating slightly. This may only be a temporary reprieve.
John Healey says UK economy is showing ‘huge resilience’
Under Tory PM “Calamity” Liz Truss 30-year gilt yields peaked at just over 5%, and that was enough to drive her out of office. Now they’re a full percentage point higher. Less than a month before Chancellor John Healey delivers his maiden Budget on October 28.
As we saw in his conference speech this week, he’d rather treat Labour members to sentimental blether about the old miner’s lamp on his desk than tell them some hard truths. Healey inherited £24billion of fiscal headroom from predecessor Rachel Reeves, which was pretty tight. Before today, it had shrunk to £9billion. On an annual budget of £1.5trillion, that’s wafer thin. Now it’s even lower.
Today’s spike is mostly down to the war in Iran, which is driving up inflation and interest rates everywhere, notably in the US. But the UK is particularly exposed, given our yields were already relatively high.
It’s a disaster for mortgage borrowers. It’s a disaster for the UK economy, as high interest rates will make everybody feel poorer and squeeze company spending and investment. It’s also a blow for the stock market, with the FTSE 100 plunging 1.8% today, along with markets around the world. That threatens the value of our pensions and Stocks and Shares ISAs.
Today’s spike will make it even harder for Healey to balance the books, which means he’ll either have to cut spending (I’m joking, he won’t) or more likely hike taxes. That will snatch still more money from taxpayers and drive more wealth makers away.
Now gilts have broken the 6% benchmark, they could climb to 7% or 8% unless the Iran war ends sharpish. Each percentage point increase adds around £10billion to our annual borrowing costs over time. It could trigger a sterling crisis, while rocketing French borrowing costs threaten the euro too. Donald Trump‘s US is also in a mess. But we are on the front line. As reality bites, Andy Burnham has nowhere to hide. Fine words won’t save him. Only tough action. Oh dear.