The sky-high cost of UK government borrowing has eased for now, but all depends on what happens next in the political arena. Government borrowing costs have stabilised despite ongoing turmoil over Keir Starmer’s premiership.
Aside from the political drama, close attention is being paid to 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 crises and investor concerns about high inflation.
Following the King’s Speech, the yield 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 is not comparable to the 0.30% surge in the wake of the 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 are based on swap rates, which are influenced by gilt yields and future expectations for the Bank of England’s base rate.
According to the Financial Times, which surveyed 10 fund managers, the biggest risk of gilt yields rising further would come if 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. This comes amid reports that Mr 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 quite 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 what extent will they be following an agenda which is driven more by the Labour back benches than from 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 organisation. “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.”
