In news that will come as a shock to anyone living in Britain, the country has reportedly become a “safe haven” for bond markets. There is a certain irony that Andy Burnham, a prime minister who has pitched himself as a change candidate, is benefitting from Keir Starmer’s attempts to bring “moderation and stability” to British politics. What has made a country with a £115-billion public sector spending deficit, the third-largest trade deficit in the world, persistently higher inflation than the rest of the G7, and sluggish growth attractive to international investors?

Unsurprisingly, this has very little to do with what is happening in Britain at present. If new Chancellor John Healey wants to thank anyone for the improvement in the country’s borrowing position, he should pick up the phone to the White House rather than to his predecessor.

Donald Trump’s economic strategy has had two main pillars. Firstly, his Big Beautiful Bill was a $4.5-trillion tax giveaway, primarily to the richest households in America. This tax cut, as well as the Iran war and other spending measures, has sent the federal deficit soaring, with expenditure forecast to exceed revenue by $2.1 trillion this financial year, over $400 billion higher than the previous financial year.

Secondly, Trump has repeatedly called for interest rates to be cut and attacked the Federal Reserve for keeping interest rates too high, with inflation remaining above its 2% target. The US President is trying to engineer an artificial boom in the economy to keep his voters happy and the stock market ticking upwards — one of the only measures that he seems to take seriously. Looking at the US from a bondholder’s perspective, there is a significant risk that Trump’s policies could trigger an inflationary spiral. Institutional investors looking for certainty are now casting their eye around the world to find lower-risk sources of debt.

The Labour government’s promise to stick to some version of the fiscal rules, the perceived independence of the Bank of England and lower-than-forecast inflation in June have all come together to make Britain an attractive place to store money. However, it does not take a financial genius to see that any “safe haven” status is likely to be short-lived.

Markets have hardly given the UK a resounding vote of confidence. The price of Treasury gilts has come down slightly, but a 10-year gilt is still more expensive than it was at the start of the year. What’s more, the headwinds facing the British economy remain significant. UK energy prices are very high, and imports are increasing 71% faster than exports. Overall economic growth is forecast to be less than 1% in 2026, and this could fall even further if the Strait of Hormuz is kept closed. A betting man would assume that inflation and the deficit are going to remain high, pushing up the price of borrowing.

The dream scenario for Burnham and Healey is that America continues to lurch from crisis to crisis: the war in Iran is resolved, but tax cuts and spending splurges keep inflation high and Trump continues his war of words with the central bank to stop interest rates being raised. However, just as likely is a scenario where the war continues but the inherent dynamism of the American economy sees production increase, inflation come down, and investor confidence return. The UK, still exposed by the conflict in the Gulf, would return to being on the inflation watchlist and the price of Government debt would slowly creep up again.

Britain must use the precious breathing space created through unstable US economic policy to develop a credible pathway to lowering inflation, reducing its trade deficit and keeping borrowing under control. The upcoming autumn Budget is a vital opportunity to do this before America sorts itself out.

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Andrew O’Brien is the former Director of Policy at the think tank Demos and currently Head of Secretariat of the Independent Commission on Neighbourhoods. He writes in a personal capacity.

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