Sometimes clever people say really stupid things. Last week, Andy Burnham, mayor of Manchester and aspiring Prime Minister, proposed Labour should borrow an extra £40 billion to spend on building council houses, large-scale nationalisation and the like.
‘We’ve got to get beyond this thing of being in hock to the bond markets,’ he said. The curious thing – and this is why it is so stupid – is that he didn’t seem to realise that if a Government wants to borrow more money, that puts it even more deeply in hock to the bond markets. That is where it gets the money from.
So it should be of little surprise that the mere fact he said this hit the market for gilts – or UK Government bonds – with the ten-year yield rising above 4.75 per cent in trading on Friday.
This Government already has to pay a higher rate of interest to fund the national debt than any other G7 country. That premium first emerged under Liz Truss in 2022, when she proposed to increase borrowing. It has risen sharply since Labour took office. Now the possibility of a Burnham government is pushing it up even further.
This might not matter so much if public finances were running on target. But they’re not.
In the first five months of this financial year the Government borrowed £15 billion more than the Office for Budget Responsibility forecast in March. Simon French, economist at investment bank Panmure Liberum, reckons it will take an extra £28 billion of tax rises and/or spending cuts in the forthcoming Budget to get the Government’s finances back on track. That feels about right. The mix will be up to Rachel Reeves, but he makes the point that if the Chancellor tries to pile it all on taxes and not make any cuts in spending, that would be badly received by the markets.
Praise be: Andy Burnham proposed Labour should borrow an extra £40 billion to spend on building council houses, large-scale nationalisation and the like
The further concern is we are becoming an outlier on inflation, with by far the highest of the G7.
The August figures were 3.8 per cent on the Consumer Prices Index, 4.1 per cent for the version of the CPI that includes owner-occupied housing costs, and 4.6 per cent for the Retail Price Index.
These are widely expected to go higher still when the September data comes through next month.
In France inflation is 0.8 per cent and in the US 2.9 per cent. This isn’t just an issue for Reeves, or the bond markets, or the Bank of England, but for all of us.
It has taken a few months to feed through, but it is now clear that the Budget last year has added significantly to inflation.
The rise in employers’ National Insurance Contributions has led to some job cuts, especially in the hospitality sector, but seems mostly to have been paid for by firms increasing their prices.
Add to that the impact of the higher minimum wage and other decisions by the Government.
So what’s next? At the moment there is not the political will to get the nation’s finances back under control. There will be more tax rises in the Budget but they won’t bring in much revenue, if any. The Tories’ changes to capital gains tax have actually cut the tax take, and it is looking as though the further hit to non-doms will have the same effect.
As for spending, cutting it seems off-limits. My guess is there will be more muddle-through until there is some sort of crisis – until in fact the bond markets force Reeves or her successor into sharp cuts in spending.
As Labour gathers in Liverpool today for its annual conference, history provides another clue.
Back in September 1976, as the UK was trying to get an emergency bailout from the International Monetary Fund, the Prime Minister, James Callaghan, shook delegates at the Labour conference, saying: ‘We used to think you could spend your way out of a recession. I tell you in all candour that that option no longer exists, and that insofar as it ever did exist, it only worked by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment.’
The challenge now is not recession and unemployment, at least not yet, it is inflation and growth. But the lesson is the same. It was bond markets then that forced Ministers to cut spending to get that loan from the IMF. I do hope we don’t go down that path again.
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