The UK government's borrowing costs are surging, mirroring the turbulent aftermath of Liz Truss's disastrous mini-budget last year. Since mid-September, the 10-year gilt yield has climbed from approximately 3.75% to 4.5%, reaching levels previously associated with significant political upheaval and policy reversals. This alarming trend is unfolding despite the Bank of England's efforts to lower interest rates, highlighting a growing disconnect between policymakers' pronouncements and market sentiment.
While the Bank of England continues its attempts to tame inflation, albeit at a slower pace than some would prefer, government borrowing costs â a crucial benchmark for mortgages, business loans, and other commercial lending â are moving in the opposite direction. This divergence is a cause for serious concern, suggesting that market participants are increasingly apprehensive about the government's fiscal trajectory. This apprehension stems from the perception that the current administration's approach is far more interventionist and fiscally expansive than previous Labour governments under Tony Blair and Gordon Brown.
The current situation presents a stark contrast to the relative fiscal prudence of previous administrations. Under Blair, government spending as a percentage of GDP rose from 35% to around 40% over a decade â a level broadly consistent with the long-term pre-Covid average. The 2008/09 financial crisis led to a temporary spike to 45%, largely due to bank bailouts, before falling back to 40% by 2019 after a period of Conservative-led rule.
The COVID-19 pandemic dramatically altered this pattern. Government spending soared to an unprecedented 55% of GDP, and despite the easing of restrictions, it remains significantly elevated at 45%. Under Shadow Chancellor Rachel Reeves, further increases are anticipated, raising concerns amongst financial markets.
The crux of the problem lies in the method of financing this increased spending. The substantial reliance on borrowing is driving up debt service costs, irrespective of the Bank of England's monetary policy. This is fueling market anxieties and contributing to the rise in gilt yields. The market's reaction underscores the inherent limitations of government intervention and the potential consequences of unsustainable levels of borrowing. History repeatedly demonstrates that, ultimately, market forces prevail, regardless of political rhetoric or pronouncements from state-funded economists. The current trajectory raises troubling parallels with past economic crises, highlighting the need for a more fiscally sustainable approach to public spending. The market's response serves as a potent warning signal, demanding a reassessment of the government's economic strategy before the situation deteriorates further.