Keir Starmer’s bid to save his premiership failed to fully reassure bond markets, but experts say a change of leadership risk driving borrowing up still further
Government borrowing costs rose in the wake of Keir Starmer ’s fresh bid to save his premiership.
Aside from the political drama, attention is on financial markets and in particular the appetite – and cost – of UK debt.
The country is, as former Bank of England governor Mark Carney declared nine years ago, reliant on the “kindness of strangers”. By that he meant investors from whom the UK borrows money, with foreigners holding more than a quarter of our national debt. With the UK’s national debt standing at £2.9trillion, and the government expected to spend £110billion this year on interest alone, even slight movements in the country’s borrowing costs can make a big difference.
The interest rate – or yield – on UK government bonds (otherwise known as gilts) rose after Sir Keir’s latest reset speech. The yield on 10-year bonds – a form of IOU – rose to just under 5%, while the rate on 30-year bonds increased to 5.69%. Lower-term borrowing costs reached a 28-year high of 5.77% last week ahead of the local elections as well as ongoing concerns about the Middle East war. They have not been at this level for a sustained period since the late 1990s.
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France’s borrowing costs are 3.6%, Italy 3.7%, and the US 4.39%. In Greece – one of the worst affected by the 2008 financial crisis – it is just under 3.8%. The UK’s borrowing costs are similar to Australia and lower than countries such as India, South Africa and Mexico. If the UK’s costs fell to those of France and Italy, it could save UK taxpayers over £20billion a year.
Financial markets had largely factored in last week’s bloodbath at the polls, with all eyes on what will happen next. Experts warn a change of leadership – and potentially Chancellor Rachel Reeves too – could push borrowing costs even higher.
Enrique Díaz-Alvarez, chief economist at financial services firm Ebury, said: “Investors are betting that Labour’s overwhelming defeat will not end Starmer’s premiership just yet, but pressure on the prime minister looks set to intensify in the coming days, with a number of backbenchers already calling for his resignation. A potential lurch to the left is what markets fear most, as this could mean higher taxes, heavier gilt issuance and a broader fiscal risk premium baked into UK assets.”
Tom Stevenson, investment director at Fidelity International, said: “It would be easy to overstate the issue. The gilts market remains very much open for business. Investors are still willing to fund the UK government’s spending plans. But the UK’s bond yields are higher than in comparable countries. Investors have a choice about where they choose to invest and the uncertainty in the UK puts us fairly low down the table of attractive destinations for footloose international capital.”
Susannah Streeter, chief investment strategist at investment service the Wealth Club, said: “Keir Starmer’s address to the nation hasn’t done the trick of calming bond markets. There is still a sense of jitters playing out as concerns about political instability collide with inflationary fears prompted by the ongoing conflict in the Middle East. His speech was designed to project a ‘keep calm and carry on’ message, but the worry is that it lacks the real substance needed to keep Labour MPs on side.”
She added: “The concern is that a change of Prime Minister would prompt wider turmoil at the top of government. It could see the Treasury’s focus on adhering to fiscal rules derailed if a new guard is brought in to pacify Labour’s rank and file.
“Political turbulence is never a good look for a nation that needs to project stability in order to attract long-term investment. The rise in gilt yields makes the government’s position even trickier, given that it further constrains its ability to support households in areas likely to be hardest hit by the Middle East conflict.
“The political challenge is increasingly becoming an economic one, with markets demanding ever greater reassurance. The longer doubts persist over the government’s stability, the greater the risk that market anxiety perpetuates the problem.”
