The bond market has finally lost patience with Labour. The 10-year gilt yield this week is back above 5% – around 5.09% as I write – its highest since the 2008 financial crisis. The 30-year gilt has touched 5.81%, its highest since 1998. Labour’s credibility is being repriced in real time. And the omens are not good.
Investors, like the rest of us, are watching a Prime Minister losing more authority by the day, and succession speculation increasing by the hour, with talk of a more fiscally left-leaning Labour leadership waiting in the wings. Add in whispers of an early election, higher oil prices, sticky inflation and the sheer volume of gilt issuance still to come, and it’s no wonder investors have increased the ‘moron’ premium to buy UK debt.
This is the point that Westminster politicians – of every party – have never quite managed to understand. When Labour MPs reassure themselves that bond markets do not ‘run policy’ and start saying silly things like the bond markets would ‘have to fall in line’, you know we’re in trouble. That is economically illiterate rubbish. The bond market has always been the referee of fiscal policy. It sets the price at which governments borrow and decides whether promises are credible. It does not need a vote in Parliament to exercise its considerable power.
A 10 basis point move in gilt yields may sound trivial to the political class. It is not trivial when the country is already carrying debt of £2.9 trillion, or nearly 94% of GDP. And with borrowing in 2025-26 of £132bn alone, or 4.3% of GDP, Britain is no longer in a world where small movements in yields can be ignored. Even small changes in market sentiment now translate directly into significant fiscal pain.
According to the Office for Budget Responsibility (OBR), debt interest spending is forecast to rise from £110bn in 2025-26 to £137bn by 2030-31. As a share of GDP, it is around twice the level seen in the decade before the pandemic. That is money unavailable for defence, tax cuts, infrastructure or the public services ministers keep promising to improve. Britain is paying interest on yesterday’s profligacy, including monetary policy errors, while borrowing heavily to fund today’s unrealistic spending. That is not sustainable.
The Bank of England is now trapped in the wreckage. In ordinary conditions, a weak economy and a softening labour market would strengthen the case for easier monetary policy. But these are not ordinary conditions. If gilt yields are rising because investors fear fiscal drift and political instability, rate cuts are not automatically read as support for growth. They can be read as weakness.
The economy can’t take much more of this.
The issue for bond investors is not whether Keir Starmer survives the next 48 hours, nor whether Rachel Reeves can continue to hold the fiscal line. It is whether Britain can produce a government willing to face economic reality. On current evidence, the answer is probably not.
Instead, the default answer in Westminster remains the same: raise taxes, protect spending, invent ‘efficiency savings’, blame global factors – and hope the markets calm down. But Britain cannot tax its way out of this mess, no country can. The OBR forecasts taxes rising from 36% of GDP this year to 38% by the end of the forecast period – a historical high for the UK and almost six percentage points above the pre-pandemic level. Spending is still forecast at just over 44% of GDP by 2030-31, around five percentage points above its pre-pandemic level.
That is the real crisis. Britain has built an oversized, unaffordable state that pretends it can be all things to all people, and attached it to a low productivity economy that cannot grow fast enough to pay for it all. Both government ministers and the public need a hard reality check.
Britain is not America. It does not issue the world’s reserve currency. It is not too big to fail. It can be punished. And right now, it is being clearly warned.
Whoever wins the next election will inherit a country where government spending still exceeds receipts, debt interest is consuming a historically large share of resources and the margin for error has almost disappeared.
The era of cheap money subsidising political cowardice is over. The era of sound economic policy has returned.
The next occupant of 10 Downing Street must shrink the state to what it can afford. Reform welfare properly. Scrap the triple lock. Confront public sector pensions. Liberalise planning. Reduce energy costs. Stop designing the tax system to punish investment, work and risk-taking. Simplify everything.
Bond traders have no particular interest in whether Starmer survives, who replaces him or when the next election is called. They care about whether the economy is back on a stable path.
At present, they have concluded it is not.
Britain’s politicians of all stripes should start listening. They have been warned enough times. The next signal from the bond market may come not as a warning, but as a punishment.
