One of the more dangerous lies in recent years is the claim that Liz Truss crashed the economy. Ask yourself: did you, or anyone you know, lose their job as a direct result of the Truss mini-Budget? Unless you’re a former Tory MP, the answer is probably no (and if you are a former Tory MP, I’d argue that other factors may have been involved). No company became insolvent as a direct result of Truss’s tax plan. The UK did not plunge into a deep recession. There certainly was an immediate reaction in UK government bond yields that was very concerning for pension funds, but this did not constitute “crashing the economy”.
The Truss episode helped to confirm in the public mind that a Conservative Party so denuded of talent by its long festival of backstabbing was now unfit to run the country. But the narrative that our shortest-serving PM had single-handedly tipped the entire economy into disaster was inaccurate and overblown. It became a trap for Labour, which has governed in abject fear of the bond markets ever since. And now Truss is having a kind of revenge, as Britain’s borrowing costs spiral ever higher and Labour is caught in a fiscal trap that is to some extent of its own making. Our long-term borrowing costs (defined as the yield on a 30-year gilt) is higher now than at any point since 1998. For a certain kind of right-wing pundit there is no image so titillating as that of Rachel Reeves going to the IMF for an emergency loan.
The idea that Labour governments are always one step from repeating the humiliation of 1976, when the Callaghan government went to the IMF for a $3.9bn bailout, is also overused. David Cameron could be heard claiming that the UK was on the brink of an IMF bailout in 2009. But the 1976 bailout was worth about £8bn in today’s money (only half of the loan was ever drawn, and it was paid off by 1979).
In reality the UK today is not as indebted as other major economies, nor is it an outlier. Our debt-to-GDP ratio is well below that of the United States, Japan, Italy, France, Canada, Belgium and others. America is $36trn dollars in debt. And because debt levels are high across major economies, yields are also high. Japan’s 20-year yield is at the highest level since 1999; the US 30-year yield has this year exceeded 5 per cent for the first time since 2007; European bonds are also at multi-year highs.
Meanwhile the bond market is working efficiently to allow the UK government to raise money. In the last month alone, the Debt Management Office has raised £17,547,770,000 from gilt investors – considerably more, in real terms, than we borrowed from the IMF in 1976 – with an average of 3.19 bids for every gilt sold, which indicates a very healthy level of demand for our debt.
This doesn’t mean things look rosy for Reeves. This Budget, or the next, is probably her last chance to make meaningful changes to the UK economy (to the extent that it is any Chancellor’s power to create economic growth) that will be evident by the next election. The UK’s high level of debt, and the high cost of current borrowing, are a huge drain on the public finances (roughly £100bn a year). But it is time to exorcise the ghost of Truss, and to stop interpreting every movement of the gilt market as a judgement on government policy. Yields today are a mixture of much less headline-friendly factors, such as the changing appetite for long-term debt from pension funds.
To the extent that the price of a 30-year government bond reflects political reality, it’s probably that investors are pricing in major long-term risks to government finances, such as ageing populations, climate change and geopolitical instability, many of which are not being addressed. The prices of long-term bonds are not an indicator of Rachel Reeves’ competence. They are bets on the shape economies will be in in decades to come.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Downing Street has derailed its own good news agenda]
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