November 24, 2023 - 8:00am
On Wednesday, after a month of rallying, the UK ten-year gilt bottomed at just over 4.05%. Almost instantaneously, Chancellor of the Exchequer Jeremy Hunt stood up in the House of Commons to present his Autumn Statement. In it, he delivered the news Tory backbenchers and their voters had long been awaiting: thanks to the leeway the Government had managed to deliver itself with its fiscal prudence, he would be able to start cutting taxes. Not much, admittedly, but hopefully enough for the Conservatives to enter an election claiming to be back on track.
But as Hunt was speaking, bond yields began rising. By the time he was done, they were up 10 basis points, or a tenth of a percent. The next morning the trend continued, and Thursday ended with the ten-year bond yield above 4.25%, a full 20 basis points higher than Wednesday’s trough. So whatever gains the Government may be hoping to score with its supporters, bond markets seem to be delivering a vote of no confidence.
It’s nothing like the Truss-Kwarteng meltdown of a year ago. But then, nothing could ever rival that. Last year’s ill-fated mini-budget delivered massive tax cuts and huge spending rises, all while dispensing with any accounting to the Office of Budget Responsibility and instead asking for a huge “trust us” from investors. Famously, they didn’t place much stock in the Government’s wonky accounting.
Stung by this experience, the Chancellor stayed well within the accounting limits set by the OBR. But if his ask of bond investors was considerably more modest than last year’s, there’s still an appeal for trust in the fine print of his budget, one which appears to be unsettling them. Most of the fiscal space the Government claims to have given itself results from real-term cuts to public spending it says it will make in the future, its plan being to raise much departmental spending more slowly than inflation. To make things worse, that “future” happens to be after the next election.
In effect, it’s saying it will hand out money today which it will then claw back after the election. But it’s hard to believe any government will actually deliver on these promises. Polls consistently reveal a public clamouring for improvements in public services after years of austerity-induced erosion, from policing to health care. What’s more, the last round of austerity, initiated by George Osborne, followed years of Government largesse. Even at that, the policy proved deeply unpopular. In consequence, Boris Johnson campaigned for the 2019 election in no small measure on a pledge to end austerity.
It’s hard, then, to picture the Government campaigning on a platform of further degrading public services. It talks of raising public-sector productivity, but doesn’t really say how it will do this. As the Institute of Fiscal Studies put it, this “does not feel like a recipe for good management of the public finances”.
After the relief that greeted the return to boring stability last year, as Rishi Sunak entered Downing Street, bond investors may now be judging that this might not be a bankable government after all. If so, that could cause it headaches in the New Year. The narrow wiggle space the Government has left itself means that even modest changes in forecasts could derail its plans. If bond yields continue to rise, the plans may come due for revision before the election arrives, forcing the Government to water down its pledges.
So keep an eye on the bond markets. Things could yet get rocky.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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Subscribe“Polls consistently reveal a public clamouring for improvements in public services after years of austerity-induced erosion, from policing to health care…”
The writer appears to suffer from the delusion that there has been “austerity”, when successive governments have been borrowing and spending money like drunken sailors since 1997. The British public don’t know the meaning of the word austerity – but they maybe soon will, when debt interest goes up.
Then we’ll see real pain. Pensions will be slashed by the use of the tax system. Healthcare as we understand it will virtually cease. Even benefits under a Labour government will be allowed to wither through inflation. People will die in numbers. Times will be interesting indeed. I’ll be interested to see what then becomes our policy on our currently open borders.
After 30 years of financial irresponsibility and mis-management, our country is at an absolutely lethal tipping-point financially, and our entire political class seems determined to simply ignore it.
Austerity and poverty, like those dreaded words nazi and fascist have been overused to the point of meaninglessness.
I live in a Council block where half the people never work or do anything productive. They sit around watching videos all day, never go out and can’t even get off their arses to walk 5 minutes to get the groceries (which they get delivered). When they are bored, they give themselves a ‘treat’ by getting a meal delivered or misbehave after getting pissed or taking drugs.
They are also of course massive users / consumers of publicly funded services which they mostly treat with contempt and they have no concept of waste or sensible mismanagement of these services.
I don’t know the last time the government did balance the books in any single fiscal year if ever. But the system surely will just collapse in my lifetime.
Precisely, well said Sir!
Looks to me like bonds were up sharply around the world yesterday. Both the 10Y US and 10Y German treasury notes were up. I think the market is betting on higher inflation for longer than they initially thought. PMI figures beat estimates (actually back positive for UK) suggesting more activity than their models would predict with 5% interest rates.
That isn’t in any way to exculpate this hapless government.
Frankly the so called Tory Party must think we are all “as daft as a brush”.
The sooner they are condemned to the ‘pit of eternal stench’, whatever the consequences, the better.
Tories compounding their own irresponsibility is no longer News.
The supposed tax cuts, which of course are dwarfed by ‘fiscal drift’ appear to have only convinced the numpties who own/run/read elements of the Right wing press – a sector of our society that indeed must share the blame for the sorry place we now reside. As Author outlines not even Bond markets think this credible yet Tory media provides yet more lying affirmation to help hoodwink the ignorant.
To which Right wing press do you refer?
There is a Conservative party supporting press but the Conservative party is far from Right wing. Currently it is basically LibDem and has been since Runaway Dave Cameron became the leader, if not long before…probably since Macmillan.
Of course Thatcher was the exception in that she was a radical, not a Tory. Nothing like that will be allowed again.
Go look at front pages of Express, Mail, Telegraph. All crowed about the tax cuts. Just like they did with Truss before embarrassingly retreating.
Cutting public services and misleading/lying/deceiving about that inevitably and intent to balance this bribe all v Right Wing Populist playbook. Don’t try to dodge it by suggesting such a tactic not. Such short term attempts to bribe are far from new and compound our problems
It’s embarassing JW. Totally agree that any so-called “tax cuts” are swamped by the fiscal drag of frozen personal tax allowance thresholds.
What we actually need far more than tax cuts is tax simplication. Simply cutting the complexity and cost of all that nonsense would save money and effort.
I see no one around with the intellect, inclination or will to do this. Not in any party. They’ll all put taxes up and make things ever more complex. They never learn.
Just wait until Kneeler and Reeves get in-time to short UK gilts big time.It will absolutely wipe out any headroom (real or imagined) that the Labour party think they might haveto spend and the peripheral tinkering of non dom status and private school vat will be seen by the bond markets as exactly that-rounding errors in a fiscally incontinent Government.
Perversely I’m looking forward to see how they respond to taking over an economy that is shot to pieces on every level-there is no historical precedent.
” But it’s hard to believe any government will actually deliver on
theseany promises.”There seems a lot of cognitive dissonance where public services, austerity and public spending is concerned. Is it really true that polls show that the public wants better public services? Is this the same section of the public that is presently paying the highest tax burden since the 1950s? Or the seemingly tiny section of the public that understands the basic figures that describe public borrowing and the future national debt trajectory?
The fact is that although taxes are at a 70 year high, and the public sector is somehow simultaneously underfunded and yet the biggest and most expensive it has ever been, the government has been nowhere even close to a fiscal surplus in over twenty years. Tax revenues now exceed a trillion pounds a year and the public sector is still so ravenous for our money that the government must still keep borrowing even more money that our children will have to pay back.
This is even during a time when the UK has been plugging the fiscal gap by resorting to foreign direct investment – ie allowing businesses to be bought by foreign investors. There is nothing wrong with this per se, however when it becomes a preferred policy just because it stabilises what would otherwise be an unmanageable balance of payments, surely the people at the top know we’re in trouble?
What is worrying is that if the markets are effectively rejecting the autumn statement, it isn’t because any of it represents tax cuts, unfunded or otherwise – it’s not a repeat of the Truss/Kwarteng debacle. As Roger Bootle points out in the Telegraph last week, analysis shows that for every pound the Treasury gives away under this budget, it claws back £4 through inflation-unadjusted fiscal policies such as income tax and CGT thresholds. Why is this important? Well, it means that the markets, which presumably know this, are saying that even with what amounts to a net increase in the tax burdern, UK PLC still can’t find enough money to keep its public sector in the style to which it has become accustomed.
I actually read the headline as “Soaring Git Yields…”.
Thanks for the best laugh of the morning. Great stuff!
Excellent news. Only national bankruptcy can force sanity into the public finances.
Before the rally mentioned in the first sentence, gilt yields were actually higher under Sunak than they were under Truss.