Labour’s economic approach has worrying parallels in history

The 10-year gold bond yield has risen from around 3.75% to 4.5% since mid-September, in the same territory as after Liz Truss’ October 2022 mini-budget.

At the time, the market was also spooked by fears that liability-based investments might collapse, as well as by the Bank’s deeply regrettable decision to announce, just days before the Trace Budget statement, that it was throwing tens of billions of pounds of additional gold bonds into the market as as he winds down his huge quantitative easing program.

Now, even without these aggravating factors, gold yields are back at levels previously thought to be high enough to trigger a collective political crisis—and a massive policy reversal.

We are in a situation where, while the Bank of England is cutting rates and talking about doing so more often, albeit at a slower pace, government borrowing costs – the real benchmark for mortgages, business finance and other commercial loans – are rising. opposite direction.

I would suggest that this is a very worrying trend, indicating that market expectations are losing touch with the statements and actions of policymakers.

While the Bank wants to cut rates further as it again tries to convince itself that inflation is being licked, financial markets are increasingly mindful that this government is far more statist and fiscally profligate than the Labor administration led by Tony Blair and even Gordon Brown – raising borrowing costs. up.

When this happens, government-funded politicians and economists often burst into loud boasts. But history shows that the result is inevitable: the market always wins.

When Blair took office in 1997, UK government spending was 35% of GDP, rising to around 40% a decade later – the long-term historical average before Covid. During the 2008–09 financial crisis, the figure soared to 45%, not least due to the bank bailout, which then fell to 40% in 2019 after 10 years of Tory government.

The lockdown changed all that: government spending rose to an unprecedented 55% of GDP, and since then government spending, instead of returning to its previous levels, is still at 45% and rapidly rising even further under Reeves.

The big problem is that while costs are rising, they are largely financed by borrowing – which is why markets are getting restless and debt servicing costs are rising, no matter what the Bank of England says.

In October alone, the government paid out a staggering £9.1 billion in interest on debt. Official estimates of total debt servicing costs in the 2024/25 financial year have risen since Reeves’ Budget from £89bn to almost £120bn – a rise that dwarfs the entire £25bn of annual tax revenue from the hugely painful rise in employers’ NICs.

Back in 1976 – in an environment of slow growth and high inflation – Jim Callaghan’s Labor government’s attempts to stimulate economic growth through increased borrowing and spending resulted in the UK receiving a bailout from the International Monetary Fund, which I called Britain’s “economic Suez”.

I’m not saying we’re heading there now – but with stagnant economic growth and rising cost pressures exacerbating already huge debt service payments, dismissing such an opportunity would be extremely foolhardy.

Although the Labor Party recently won a landslide victory, it is by no means 1997. A more accurate historical comparison—and I say this deliberately—is 1975.

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