Bonded to the Unelected Markets

Fraser Nelson

Chez Antoinette has become an unofficial annexe of Westminster, famous for its steak frites and fresh political gossip. One journalist I know once stayed there for breakfast, lunch and dinner, filing stories after each meal. So when I met a recently departed Starmer aide there, I asked the obvious: what’s going wrong in government? Who messed up most? His answer came quickly: the Debt Management Office. That lot, he said, have the most to answer for.

We’re now at a stage where every fiscal decision is judged by invisible creditors, every policy constrained by their likely verdict. Britain is not just governed: it is under supervision.

This agency of the Treasury simply sells government debt — but did so, my lunch partner said, in a way that turned inflation into a fiscal catastrophe. As a result, our governments are now slaves to the debt markets. It is traders in these markets who ejected Liz Truss and threw Rachel Reeves a lifeline this week. They terrified Starmer into making welfare cuts, portraying him as mean-spirited and triggering rebellion. Just as dismay over Tory failures led to the rise of Reform, an inability to increase spending now leaves Labour vulnerable to resurgent Corbynism.

Zarah Sultana’s decision to set up her own Corbynite party is a logical response to all of this. The polls have led dozens of Labour MPs to think they are doomed, unless they can pose as insurgents. Others think they may as well go down fighting for a cause. As Starmer and Reeves focus on what they once called austerity, they create the very opening a new populist left needs.Zarah Sultana with Jeremy Corbyn. The former Labour MP has announced plans to set up her own party, though it is unclear whether Corbyn will be joining her

It’s still hard to see Tories as the answer, given their authorship of so many problems. Because they know what they still haven’t quite admitted: they did not “fix the roof” but tore off the last slabs. So Britain’s finances are now dictated, to an absurd extent, by investors who lend the UK government the billions it needs every year. This leaves the UK more exposed to market likes, loves and whims than any other major country — not so much because we’re heavily indebted but due to the short-term nature of that debt.

This was first explained to me by Rishi Sunak. He had recently become chancellor and was new enough to have a Mr Smith Goes to Washington shock about what he found. Lockdown was bad enough: how could they close the schools, he once asked at cabinet, without discussing the impact on pupils? There was silence. He was being introduced to the laws of political short-termism: don’t ask about tomorrow. That’s someone else’s problem.

The same thinking seemed to govern the national debt. All countries had borrowed, but most had done so locking in low rates for ten or more years, come what may. They paid a bit more for the certainty but did so anyway: if inflation came back, they’d be protected. But Britain was gambling on that never happening. About a quarter of our national debt was linked to inflation, so if rates rose taxpayers would be hugely on the hook. No major country had even half as much exposure. It was a bomb, primed to explode under British public finances.

Sunak was told to stop worrying about inflation, but didn’t. He’d run the numbers, but could barely believe them himself.

We can all believe them now. UK debt interest, almost £50 billion a year then, is now £116 billion and rising. The extra £66 billion buys us nothing but it’s far more than we spend on transport, police, prisons and courts. When inflation first returned, Germany’s debt interest actually fell: they had sensibly locked in low borrowing rates. Britain had done the opposite: exposed the nation not just to inflation but to every twist in the global wind.

The other killer was the post-crash money-printing, quantitative easing, done in a way that swapped long-term security for short-term risk. This is how Britain ended up more exposed than almost anyone else to markets and their daily mood swings. When Reeves wept in prime minister’s questions, looking as if she was about to resign, market jitters added a quarter of a percentage point to gilt yields, or borrowing costs. Such a change could mean about £1 billion extra a year in debt interest — so £500 million for each of her tears. When Starmer announced she’d stay, rates fell. Crisis over.

It’s not that markets are wild about Reeves, whose growth agenda has flopped. But they suspect her successor would be worse: less fiscally credible, more fearful of Labour rebels. And this is the brutality of debt politics. The UK is now wired into the markets, with financial shocks triggered at every flicker of bad behaviour.

So if you’re wondering why British politics feels so haunted — why ministers look hunted, why opposition leaders speak as if under duress — and why no one seems free to govern as they please, it’s because they aren’t. The power over budgets now lies not in the Treasury nor even in parliament but with the bond markets. At the recent Times CEO summit, Reeves spoke about this. She could cave in to pressure and loosen her borrowing rules, she said, “but what would happen? Gilt yields would go up more, so the cost of servicing the whole stock of debts goes up.” Quite.

We’re now at a stage where every fiscal decision is judged by invisible creditors, every policy constrained by their likely verdict. Britain is not just governed: it is under supervision. This is the price of failure to balance budgets: to live at the edge of your “fiscal headroom” is, now, to be in hock to the markets. But no one is willing to say so because it’s all too complex (or too embarrassing) to explain. This lack of candour makes governments look inexplicably timid, inviting populist challenge.

Confront the billionaires, declares Sultana. Challenge the banking globalists, says Nigel Farage. As one radical put it: it’s time to be bold, show leadership, speak through actions “and the markets will calm down”. This was Kwasi Kwarteng, speaking in the pub shortly after delivering the Truss mini-Budget.

Anger, populism, market meltdown, panic, austerity — then more anger. This is the doom loop of Latin American politics and Britain is drifting towards it. The only way out is through radical spending reform: to cut and reshape, do more with less, take control of debt before debt takes control of politics. It would mean the telling of hard truths. And if no one does? Then markets will keep governing in silence, while ministers mouth the words.