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January 8, 2025 - 10:10am
2025 is already shaping up to be a difficult year for Britain. Earlier this week it was reported that the yield on British 30-year Government bonds — or “gilts” — had risen to their highest level since 1998. At 5.22%, the current yield on a 30-year Government bond is now higher than when the markets experienced a convulsion after the failed tax cuts of the Liz Truss government in 2022.
The last time that yields were this high was because the Bank of England needed to raise interest rates dramatically to stem the bleeding from the 1997 Asian financial crisis. Because this was an external problem, 1998 is not a crisis year in British memory. But today the yields are high simply because the markets are becoming less interested in holding British public debt.
The problem is that the British Government is still borrowing heavily with a budget deficit of 4.4% of GDP. The rise in yields reflects the fact that the Government is having to issue very large volumes of debt into the markets. Analysts are saying that the market demand for these assets is mixed with the recent auction having the weakest oversubscription rate since 2023. Labour will now be forced to continue risking ever higher interest rates or engage in even more austerity, likely by hiking taxes.
This is a precarious position to be in. In 2023, the Office for Budget Responsibility (OBR) registered its concerns that the share of debt held by foreigners had doubled since 2004 to around 25%. Britain has been running enormous trade deficits in recent years, contributing to the changes in the share of debt. The only way that the country can live far beyond its means is to sell financial assets to foreigners.
But, as the OBR notes, foreign investors are more likely to cut and run if they do not like what they see happening in the British economy. “Smaller changes in the relative attractiveness of gilts can mean foreign investors quickly switch to other assets in potentially large volumes,” the OBR analysts say. If something like this were to happen, we would start to see significant pressure on sterling.
It is no secret that the British economy, after years of deindustrialisation, relies heavily on its financial sector. Any serious sterling volatility would be a huge threat to this sector which relies on its ability to sell sterling assets at relatively stable prices. The Treasury would have to do whatever it takes to stabilise the currency, which could include a return to extremely harsh austerity through spending cuts and tax increases.
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SubscribeThe Special Relationship is a fantasy held by the UK but certainly not by the USA.
Trump will do whatever he considers to be in the best interests of the USA…that’s his job.
Crikey! Bit of a radical thought that an elected leader might but their country first. What is the world coming to!
But putting your country first sometimes means taking into account the interests of others
Yes…and putting them far behind the interests of one’s own country!
Britain never gets a quid pro quo from the USA. Biden regards Britain with utter contempt.
We are heading for a recession and I can see no evidence of the Government taking thigs seriously and making any attempt so divert the, seemingly, inevitable.
I expect an increase in my money being diverted to expand and prop up the Public Sector for no visible benefit.
We are headed for recession and it is due to the way they chose to address the deficit (by raising tax on business). Why raise tax on business when the UK has vast, often unearned, property wealth to tax instead. Especially as the property wealth will simply disappear anyway if there’s serious crisis.
Then wouldn’t that be like taxing Scotch mist?
If you tax some of it before it’s gone it might not be lost…
The Government have no intention of taking things seriously. They are clearly intent on making things as bad as possible and blame it on their predecessors. There is no intention to improve things while they are under the belief that they can blame any and all fiscal woes on the previous administration. It’s clear that this Government are not big on accepting responsibility for anything.
I fear it’s even worse than that.
I suspect the Starmer ‘administration’ doesn’t even understand the problem. Rachel Reeves would struggle with A-level Economics.
And further… even a smidgeon of understanding that it’s the City that keeps the whole country financially afloat would be anathema to them.
If you believe that “the City” is a solution to anything, you’ve been sold a bill of goods …
They are intending on spending £20billion on a carbon capture machine! They’re seriously insane.
We are being sheared like the sheep they take us for.
Given their insane policies, it is as if they are doing everything to spur on a total economic collapse, as if they want to bring us to our knees in every conceivable way. Given Starmer’s love of Davos I can’t help but think that they really are bringing it in for the build, back, better crew and the Great Reset.
What magical solutions do you think have ready for the problems of their own making?
Most of us probably grew up in a Britain where inflation and interest rates were far higher than we’ve recently lived through and sterling crises were routine.
I’ve always been sceptical of the idea that these had somehow been magically solved some time around the mid 1990s. Not least because I can’t pin down any fundamental changes to justify that view. Rather, I’ve always believed that we hadn’t done any of the hard work necessary and were just enjoying a long period of exceptionally good luck with the wind at our backs.
We’ll know soon enough whether Britain reverts to the mean. I suspect it will.
We had North Sea oil and gas, which helped in the last few decades, but that’s coming to an end, and Milibrain is busy destroying the industry anyway, accelerating the process. We’re screwed.
It’s only coming to an end because the UK government won’t exploit it…there’s a lot left.
Sadly, it is a declining asset and it’s never going to be 10% of UK GDP again. But you’re dead right that we should be exploiting it. Come the next sterling crisis, perhaps we’ll wake up and figure that we could impove our balance of payments by producing more at home. Far better for UK gov to levy lower taxes on higher UK oil and gas production than raise taxes and kill production completely.
Some good luck perhaps, but more like keeping the party going by running up debt. A bit like using the credit card to maintain expenditure if your income falls – works up to the point the bank wants their money back.
Given the government’s approach to piling extra costs and taxes on private enterprise and codling the public sector why should Bondhoders have much faith in the UK economy? When our billionaires are being encouraged to flee overseas why would foreign capital regard Britain as a safe place to park their capital?
I am counting on that UK govt don’t collapse like we are seeing many western govts lately. I am afraid we are heading one world west called Oceana?
Oceania, Eastasia and Eurasia are coalescing in real time. I’m thinking that Orwell had seen some plan…
I always took Oceania to be the UK, it’s empire and commonwealth, plus the US. Mainland Europe was merely a place the big three fought over (hence why GB was ‘Airstrip One’).
Just looked it up – Wikipedia has mainland Europe as part of Eurasia.
All true, but the US Treasury is not in great shape either.