As Andy Burnham walked into the House of Commons for the first time since he became Prime Minister on Tuesday, a storm was under way in the bond market. Concerns that wars in Iran and Ukraine, drought and heatwaves will trigger a fresh spike in inflation sent government borrowing costs globally surging to multi-decade highs. In the UK, long-term borrowing costs hit their highest level in 28 years.
It is a problem for the Prime Minister and John Healey, his Chancellor, as they begin planning their first Budget, to be delivered next month. For all Burnham's cheery talk of ditching the dour approach of Sir Keir Starmer and governing with a fresh "sense of optimism", the former Manchester mayor's options are severely constrained by the cold, hard reality of the nation's dire finances. Much as he wants to boost spending on everything from council housing to defence to social care, the near-£3tn national debt bequeathed to him puts tight limits on any new borrowing plans.
And the financiers who lend to Britain in global markets are alert for any hint of profligacy, amid growing fears of excessive debt around the world. It presents serious economic and political risks for the Prime Minister. Just as Liz Truss hopelessly misread the mood in financial markets – cutting taxes and ramping up spending at the very time interest rates were rising – so Burnham risks launching a fresh round of borrowing at the worst possible moment.
We all know how costly Truss's misstep turned out to be. Borrowing costs are already considerably higher today than they were at the height of the Truss panic. Britain pays more than 5.2pc on its benchmark 10-year debt.
That compares to a brief peak of just more than 4.6pc in the autumn of 2022. Our borrowing costs are also the highest in the G7 economies by a considerable margin. The next-highest is the nearly 4.8pc paid by the US, which is currently battling to avoid its own debt crisis.
Even before this latest surge in global borrowing costs, Burnham faced an increase in the Government's debt interest bill. Official projections from March – made just before the start of the war in Iran – showed that the annual cost of servicing the debt was on course to rise from more than £130bn this year to more than £160bn by the end of the decade. Simon French, the chief economist at Panmure Liberum, estimates that higher bond yields in markets could add a further £6bn to the bill.
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