The sky high cost of UK government borrowing has eased – for now – but all will depend on what happens next
Government borrowing costs have stabilised despite ongoing turmoil over Keir Starmer ’s premiership.
Aside from the political drama, there is also close attention on bond markets given the UK’s reliance on debt. The UK’s cost of borrowing is already among the highest of any advanced economy, a hangover from previous crisis and investor concerns about the high level of inflation.
Following the King’s Speech, the yield – or rate – on both shorter and longer term Treasury gilts fell and then rose slightly. By lunchtime on Wednesday, the yield on 10-year gilts stood at 5.09%, while for 30-year gilts it was 5.76%. The recent jump in gilt yields isn’t anything like the 0.30% jump in wake of failed Tory PM Liz Truss ’s mini budget of 2022.
There are concerns that a change in leadership could push gilt yields even higher, with implications for millions of people and their finances. Fixed rate home loans and based on what are called swap rates, or how much banks charge to loan to one another. Those swap rates are influenced by gilt yields and future expectations for the Bank of England’s base rate.
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According to the Financial Times, which asked 10 fund managers, the biggest risk of gilt yields rising even further came if he were replaced by Greater Manchester mayor Andy Burnham replaced Mr Starmer as PM. At the other end of the scale, health secretary Wes Streeting, was considered the least risky option. It comes amid reports that Ms Streeting was preparing to resign as early as tomorrow.
Economist Paul Johnson, former head of the Institute for Fiscal Studies, said: “We’ve seen considerable damage already. The cost of government debt rose quote dramatically yesterday. That matters for all of us because that means the government needs to spend more than it otherwise would servicing our enormous pile of debt. That means there is less money for everything else.
“Political instability does have a cost and we are still seeing the effect of that enormous instability we saw four years ago during that short Liz Truss premiership. That is when our cost of borrowing really went to the top of the international pile and it’s stayed there since.”
He went on: “What the markets are concerned about is, if there is a new leader, will they be more or less fiscally prudent than the current government and will they be more or less focused on economic growth and to make extent will they be following an agenda which is driven more by the Labour back benches then from as you may see as a Treasury agenda. That uncertainty is what is driving those additional costs.”
Gilts and the pound could be plunged into crisis should Mr Streeting resign and mount a leadership challenge, warns the boss of deVere Group, the independent financial advisory and asset management organisations. “The markets hate uncertainty, but they hate political vacuum even more,” he said. “A cabinet resignation followed by a leadership fight would signal that the government is losing control of itself while investors are already questioning the country’s fiscal direction.”
