Sky-high Borrowing Costs for Labour in UK Top Charts Among Developed Countries
Unfiltered, Unbridled Analysis:
As the Covid-19 pandemic began to unfurl its destructive tendrils just over five years ago, Robert Chote, heading the UK's Office for Budget Responsibility (OBR), passed the word in the House of Commons: in dire circumstances like these, it's perfectly fine for the government to accrue more debt. The general consensus was that, as the crisis passed, the authorities would chip away at the accumulated mountain of debt.
Fast forward, and the pandemic had barely faded when the Russian invasion of Ukraine sent energy costs spiraling. You guessed it - another round of expensive subsidies from the government to keep citizens from turning into icicles at home.
The red ink expanded on a global scale, with national debts climbing due to consistent deficits resulting from governments overspending compared to their tax receipts, year after year. The aftermath has been grim. The UK's credibility took a massive hit with Liz Truss' mini-Budget of 2022, with international bond investors snubbing the country, causing the pound to plummet on foreign exchanges and the pension system teetering on the brink of collapse.
With Chancellor Rachel Reeves launching her inaugural budget in October 2024, raking in a whopping £40 billion in new taxes, yields on gilts – UK Government bonds – once again climbed to worrying levels, hinting at the risks investors perceive when lending to Britain under Labour. Translation: interest payments on the UK's borrowing have skyrocketed.
In Reeves' Spending Review of last week, plans to 'invest' £2 trillion over five years in ventures ranging from healthcare to research and development were unveiled. With the UK's ten-year Gilts yield now standing at 4.55%, this puts it in the lead among the G-7 richest nations.
Think Italy, once a basket case, is a safe bet with bond yields of 3.48%. Greece, which came dangerously close to bankruptcy 13 years prior?, commands bond yields of only 3.27%. Keep in mind, the UK's government debt was already unwieldy at 80% of national wealth before the pandemic. Now, it's hovering dangerously close to 100% of national output.
The Debt Management Office (DMO), tasked with funding the government's operations, now faces a Titanic task. In the current fiscal year, the DMO needs to sell more than £300 billion in Gilts to refinance existing debt and meet new borrowing needs.
Despite a readily available market among UK banks, insurers, and pension funds – who are required to hold Gilts for prudential reasons – selling Gilts has proven challenging. In April, the DMO even temporarily suspended the sale of long-dated bonds due to market concerns over escalating risk.
Capital One is by no means the only culprit when it comes to maxing out the credit card. Worldwide, public debt is set to reach 100% of global output by the end of this decade.
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Gone Bankrupt: The UK's Prodigious Debt Spending Spree
America stands accused as one of the world's biggest debt offenders. Since the Second World War, its debt has ballooned to $27 trillion (£20 trillion), with a third belonging to foreign investors. Donald Trump's financially extravagant 'big beautiful' finance bill, which extends tax breaks for better-off Americans, would add another $3 trillion to the tally.
America, being the guardian of the dollar – the world's dominant reserve currency – has the privilege of more easily borrowing than other Western democracies. However, Trump's trade battles and tax-cutting ambitions have seen the country's primary creditors – Japan and China – significantly decrease their dollar reserves. Other central banks have taken similar actions.
In times of turmoil, such as the ongoing conflict between Israel and Iran, the dollar and the United States – boasting vast oil reserves – are still seen as sanctuaries. The United Kingdom, lacking such privileges, faces greater concerns in the bond market.
Another sticking point that has weakened UK bonds is the hurried transfer of traditional company pension funds to insurers, such as Legal & General and Aviva. Once in control, these insurers unload Gilts and swap them for higher-yielding corporate bonds, weakening the value of UK debt.
The DMO may still be able to finance the debt at present. However, Labour's £2 trillion investment plans cast a dark shadow over the market. Additionally, the political dispensation's inability to tackle escalating welfare bills and public sector salaries is not helping the situation either.
As things stand now, the nation is forking over twice as much in interest payments as it spends on its growing defence and national security budget. That cannot, under any circumstance, be a shrewd use of the average worker's hard-earned tax money, as per Labour's idealized view.
- The UK's debt accumulation, exacerbated by the pandemic, has raised concerns about the country's financial stability, particularly in relation to investments and pensions, as interest payments on the UK's borrowing have skyrocketed.
- The Debt Management Office (DMO) faces a significant challenge in selling £300 billion in Gilts this fiscal year to refinance existing debt and meet new borrowing needs, as the UK's government debt, already at 80% of national wealth before the pandemic, is now hovering dangerously close to 100% of national output.
- The aftermath of the pandemic has revealed a trend of global overspending by governments, leading to an expansion of national debts, and causing concerns in the finance and business sectors, as economies grapple with issues of taxes, investing, and the value of their debt.
