The front pages of the Financial Times, Bloomberg, the Times and others this morning all refer to Andy Burnham’s comment to the New Statesman, in this week’s cover story, that: “We’ve got to get beyond this thing of being in hock to the bond markets.”
On the face of it this is the same thing as saying, “We’ve got to get past this thing of being three trillion pounds in debt,” which is easy to say and difficult to achieve. I would very much like to get past the thing of being in hock to my mortgage provider, but that will take more than a change of attitude. Liz Truss – whom the New Statesman has also interviewed this week – believed that the government could simply crack on with policy and stick two fingers up to the market, and we know how that went. Those briefing against Burnham reportedly claim that he could become the Liz Truss of the left.
However, as Burnham explains, his thinking is not that Britain can simply ignore the fact that our public debt is pretty much the same size as the economy itself. He correctly diagnoses Britain’s most serious political problem – that everyone since Truss and Kwarteng has done little more than tinker at the edges, nervously awaiting another attack by the bond vigilantes – as the result of a failure of political control.
This was one of the key factors that unseated Truss, whose defenestration began when she capped the nation’s energy bills in September 2022; she had ceded control of government borrowing to a volatile energy market. It was also true when the government was defeated in its attempt to save £5.5bn from its welfare bill this summer, and Rachel Reeves was seen in tears on the government front bench; gilt yields rose at the prospect that the government was not fully in control of its spending. Burnham’s point is that the key spending areas in which Britain has lost control are “housing, energy, water, rail, buses… the basics of life”.
Burnham has said he would borrow an additional £40bn to fund the building of social housing, which could be a significant form of cost control. Local government spent £2.8bn on temporary accommodation in 2023-24, and analysis by the New Economics Foundation suggests the government spends about six times as much on housing support (paid to private landlords) as it does on building affordable housing. Burnham – “the anti-Thatcher”, as Tom McTague describes his position – recognises that in surrendering ownership of its assets, Britain surrendered control of its costs, which is why the bond market prices in a lot of uncertainty about how much we are likely to borrow in future.
However, this is not only a question of how much investors think the government will borrow (or to put it another way, how much debt the government will supply to the market). Government bond prices are an expression of supply and demand, but they’re also an expression of the expected prices of everything else. Buying a bond involves making a prediction about how much inflation there will be over the period before the government pays you back, because if inflation rises, interest rates will probably rise. As an investor, you don’t want to buy cheap debt if you’re expecting debt to get more expensive in future. This was another factor in the reaction to the Truss-Kwarteng mini-Budget: investors compared it to other tax-slashing Budgets (such as the Anthony Barber’s in 1972) and concluded that it would lead to higher inflation and interest rates, and adjusted the returns they expected accordingly.
This is a key point to understand about the bond market, which is often spoken of as if it has opinions about government policy. In fact it only appears to take an interest in politics, and only to the extent that it can inform its participants’ predictions about the future supply of bonds and the future path of interest rates.
In this sense, Burnham and Truss do have something in common. Both expressed a distaste for the question of who is in Downing Street, and concern about who really decides what politics can achieve. For Truss “the market” is a cabal of OBR economists and Bank of England officials conspiring against her. For Burnham it is just a market, but it is one the government has afforded too much power, by putting fiscal rectitude ahead of radical change.
[Further reading: The new battle for Labour’s soul]
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