Chancellor Rachel Reeves is rightly wary of bond market vigilantes, given the UK's high debt levels and recent fiscal instability. The term 'Bifs' (Britain, Italy, France) has emerged to describe countries with poor debt records, replacing the earlier 'Piigs' label from the eurozone crisis. Reeves has pledged to reduce the annual deficit below 2% by 2031, a move praised by IMF chief Kristalina Georgieva as a good example for other nations.
Bond vigilantes target countries that cannot control annual spending, and the UK's deficit remained at 5-6% after pandemic spending. The yield on 10-year UK bonds rose from 1% in early 2022 to 4.9% recently, driven by factors including the Bank of England's shift from buying to selling bonds, the Ukraine war, and political instability under Keir Starmer's leadership.
Reeves could ease pressure by ditching one self-imposed fiscal rule: the requirement to reduce the debt-to-GDP ratio by the final year of the OBR's five-year forecasts. This rule currently blocks long-term defence investment, which may take years to implement. Critics argue that maintaining such a rule is illogical when defence spending is vital for national security.
Leftwing MPs may view IMF backing as fiscally conservative, but without overhauling international bond market rules, the UK must comply. However, Reeves has room to reform her own rules to allow essential long-term investments without triggering bond market backlash.
