• Why Britain’s gilt yields are the highest in the G7

• How the ‘Burnham premium’ could cost every working household £300

• Labour’s plan to borrow an extra quarter of a trillion pounds across a single Parliament

The speech is followed by a candid Q&A, in which Stride tackles the prospects for a Tory-Reform deal, the case for keeping the triple lock and the limitations of the OBR. You’ll find links to watch or listen to the full episode below, as well as an excerpt from the transcript.

Marc Sidwell
Editor, CapX

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Transcript

Today, our country is paying more to borrow than any other major western economy.

The yield on 10-year gilts is now sitting consistently above 5%.

Meanwhile, average yields across the rest of the G7 currently sit at about 3.5%.

That is a very significant premium. It is a damning verdict by markets on the current government.

And it has serious implications for all of us, costing us billions more in debt interest.

The immediate context, of course, is the chaos surrounding the leadership of the Labour Party.

But beyond that, it is about a deeper problem with economic and fiscal policy in our country.

And while politicians frequently complain about reckless borrowing, too often those same politicians have nothing concrete to say as to what they would do about it.

Or worse still, they come out with a list of fanciful and unfunded promises of their own.

That is not responsible.

It is not honest.

And it is not leadership.

Any serious party worthy of governing our country must have a clear answer as to what they are going to do about our rising debt.

I want to make a very clear statement – not just about what has been going wrong, but about my own party’s commitment to putting it right.

The most immediate problem, of course, has been political instability.

Last week, you could literally map the fluctuations in yields against the news reports on the latest resignations or rumours of leadership challenges. On Friday, for example, the market jumped 18 basis points, in response to the news that Josh Simons would be stepping aside for Andy Burnham.

To put that in perspective, if that increase was sustained across the Office for Budget Responsibility’s forecast, it would add nearly £2 billion to annual debt interest spending, and would cost £5.4 billion cumulatively across the five-year forecast. That’s £300 for every working household in this country.

There is now a ‘Burnham premium’ on our borrowing costs.

As we all know, if there is one thing markets dislike, it’s uncertainty.

But this is not just about uncertainty.

It is also about what the political context means for policy.

Markets do not care about personalities – they care about the fundamentals.

And there are two important fundamental factors here.

One is the prospect of a new Prime Minister coming in with a plan to borrow even more and to raise taxes, with no understanding of how markets will react.

On this latter point, Burnham has previously said the Government is too ‘in hock to the bond markets’.

One of his parliamentary backers said the bond market would need to, quote, ‘fall into line’.

He also suggested last month that we should treat defence spending as an exception to the fiscal rules – as if borrowing for defence is somehow different to any other borrowing.

Or you can look at Angela Rayner and the litany of tax rises she wants to bring in.

And even Wes Streeting, positioned as being more moderate, with his past comments on significantly increasing capital gains tax.

Investors are rational. If they see leadership hopefuls queuing up to borrow more or mismanage the economy, then they price that in.

The other factor is what the Prime Minister’s weakness means for the policy direction of the existing Government.

Even if Keir Starmer struggles on, it’s very plain that his Government is in hock not to the bond markets, but to his own backbenchers.

Policy is being dictated by those who are addicted to tax and spend, with no appreciation of the trade-offs or any capacity to take the difficult decisions that are sometimes needed.

And we see the consequences. Last week, the Prime Minister delivered a reset speech – which seems to have become a monthly fixture these days – in which he pledged to nationalise steel. A direct sop to the Left of his party.

The King’s Speech contained no measures to control the ballooning welfare bill, because there is no prospect of reforms making it past those who sit behind him.

This is a government unable to take tough decisions and increasingly compelled to lurch to the Left – a recipe for more borrowing, more taxes and higher inflation.

Again, investors are rational. The market can see what is happening, and they price it in.

So, it is not just the prospect of a change of leadership which is driving up gilt yields, it’s what the attendant pressures are imposing on current policy.

But beyond the recent chaos in Downing Street, there are other, deeper factors at play…

You can read the speech in full on CapX. For the full event, with Q&A, watch or listen to The Capitalist.

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