UK government borrowing costs, known as gilt yields, saw a significant increase this week, climbing from 4.76 per cent to approximately 4.85 per cent for ten-year bonds. This rise in yields, which occurs when bond prices fall, is attributed to growing concerns over a potential shift towards left-leaning policies under Andy Burnham, following his recent by-election victory. Experts suggest these yields may continue to climb due to anticipated pressures for increased government spending and potential modifications to fiscal rules.
The market reaction coincided with the release of economic data revealing a substantial increase in UK borrowing. For the past month, the gap between tax revenues and government spending reached £23.3 billion, an increase of £5.4 billion compared to the previous year and exceeding official forecasts. A significant portion of this deficit was driven by a record £11.7 billion in interest payments on government debt, alongside increased spending on public services and benefits. Although the Treasury collected £6.9 billion more in taxes compared to last year, overall spending rose at a faster pace, leading to a wider deficit.
For the first two months of the financial year, combined borrowing stood at £46.3 billion, £8.9 billion higher than the previous year and £7.7 billion above the projections made by the Office for Budget Responsibility (OBR) in March. These figures highlight the significant spending constraints that would confront Burnham should he aim for the premiership.
While global factors, including geopolitical tensions in the Middle East, also contributed to rising bond yields across Europe, analysts pointed to Burnham's victory as a likely catalyst for added pressure on gilt yields. Economists anticipate that tax-funded spending increases and a marginal loosening of fiscal rules are probable, potentially impacting the government's commitment to debt reduction and borrowing targets.
Economists also noted that Burnham might face pressure to increase spending, particularly on defense and public services. There is also a possibility that backbench Labour MPs could resist measures aimed at curbing the national benefits bill to balance the budget. Allan Monks, chief UK economist at JP Morgan, expressed a high risk that Burnham might consider altering fiscal rules, despite recent indications to the contrary. Neil Wilson, an investor strategist at Saxo UK, stated that markets are already factoring in the uncertainty surrounding a potential leadership race and the likelihood of Burnham becoming Prime Minister, viewing him as a less market-friendly option. He warned of the risk of "populist, expensive promises that spike gilt yields," suggesting that while Burnham is a shrewd operator, his electoral appeal may rely on ambitious proposals.