Under other circumstances, the anecdote would have made for many jokes. At the moment of current weakness of the British Government, it is revealing. Former Conservative Prime Minister Liz Truss, who in her brief mandate of just 50 days sank the public debt, the pound sterling and the international credibility of the United Kingdom, has sent the Labor Prime Minister, Keir Starmer, a legal order to stop say precisely that: that because of her the markets went into panic. If Downing Street persists in continuing to tell the truth – understand the irony – Truss threatens to go to court.
The Conservative Party, which voters turned their backs on last July after 14 years of deterioration in public services and a ruinous Brexit, today appears emboldened by clear signs of economic weakness.
Starmer, and his Economy Minister, Rachel Reeves, are struggling these days to convince the markets that they have everything under control, and that it will not be necessary to raise taxes or impose more cuts. British public debt has plummeted this week. The bond interest rate has reached almost 5% (4.93%), the highest peak recorded since the 2008 financial crisis. The pound sterling has fallen to its lowest level in a year.
It is more expensive for the Government to borrow, and the payment of the debt has already practically eaten up the cushion of almost 12,000 million euros that it set aside in its first budget, at the end of October.
Reeves visits China this week. The trip was planned well in advance, and its objective is to relaunch commercial and economic relations with that world power. But it has coincided with the debate in Parliament of an urgent motion raised by the opposition, regarding the current concern in the markets over the debt situation. And both Labor and Liberal Democrats have accused the minister of fleeing, and of sending a junior to the House of Commons in her place.
“Where is the minister?”
“Where is the minister? It is regrettable that in these difficult times, when we are faced with such serious issues, there is nowhere to find it,” the conservative spokesman for the Economy, Mel Stride, cried out in the parliamentary debate.
The person in charge of defending Downing Street’s position was the Secretary of State for the Treasury, Darren Jones. “Let there be no doubt about this Government’s commitment to economic stability and healthy public accounts,” he stated in the House of Commons. “Our compliance with the fiscal rules is non-negotiable,” said Jones, in an attempt to curb the markets’ fear that the new Labor Executive will be forced to take on more debt to avoid new tax increases or further cuts in public spending.
Despite the opposition’s attempts to present a situation as chaotic as the one caused by Truss, whose crazy tax reduction in autumn 2022 triggered the public debt market and spread panic in the markets, the situation in the Kingdom United seems, for the moment, controlled. The United States has also seen a historic increase in bond interest rates, due to the fear and uncertainty of analysts regarding the economic policy of the new Donald Trump Administration.
“Much of these price changes [de la deuda] “It reflects global factors that are occurring in the United States, Europe or the United Kingdom,” said the deputy governor of the Bank of England, Sarah Breeden, this week in Edinburgh. The Government and the British economic institutions insist these days on emphasizing that the placement of debt continues to be carried out in an “orderly” manner. Demand far exceeds supply of bonds.
But there is a reality that corresponds exclusively to the United Kingdom and that is putting the Starmer Government in serious difficulties. The budget presented in October was a hard blow for British businessmen, who saw their tax pressure increase. The part of the social security contribution (the so-called national insurance) that companies pay will increase significantly starting in April.
In the last three months, criticism of the Government and signs of distrust have multiplied. Starmer has been caught in unexpected battles with a high political cost, such as the rebellion of pensioners over the elimination of subsidies in the energy bill, or that of farmers over the increase in inheritance tax.
The economy remains at zero growth, and inflation has risen again to 2.6%, after the previous Conservative Government of Rishi Sunak had lowered it to 2%.
“Both weaker growth and higher interest rates put pressure on public finances. “Unlike most other large developed countries, the UK borrows money at an interest rate much higher than its underlying economic growth rate, which worsens debt dynamics,” says Peder Beck-Friis, economic analyst at the investment firm PIMCO.
Minister Reeves has demonstrated from the beginning of her mandate a budgetary rigor that, according to her, previous conservative governments never had. One of the golden rules imposed by the current ministry is to finance current spending exclusively with tax revenues, and not with more debt.
The fear of many Labor members, given the current pressure from the markets, is that Reeves will end up giving one more twist and introduce new cuts. The party faces important regional elections on May 1, and senses that voters could express their disappointment with Starmer through severe punishment at the polls.
