Ultimately, it’s the government that needs to find nearly £2 billion a week to plug the gap between what it spends and what it takes in taxes. Global investors, who currently hold around one-third of all U.K. government debt, are under no obligation to keep lending to it.
Moreover, said Fathom Consulting managing director Erik Britton, even Burnham’s row-back is problematic.
“The U.K. is in hock to bond markets because it has borrowed from them,” Britton said on LinkedIn. “Asserting that we should not be ‘in hock’ is like asserting that you are intending to default. That’s just not a smart move for a potential PM.”
Irrespective of the outcome of any leadership bid, investors appear dismayed by the latest iteration of a U.K. political pathology characterized by panicked and simplistic responses in the face of complex and hard-to-change economic realities: population aging, inequality, geopolitical fragmentation and environmental degradation.
“Any new prime minister would be subject to the same constraints that the current government is facing,” Bill Papadakis, chief investment officer with private bank Lombard Odier, wrote in a note to clients.
Papadakis noted that for all the drama of the last two years, Starmer’s government has succeeded in narrowing both the budget deficit and the current account deficit, and he argued that “a radical change in fiscal stance is neither immediate nor particularly likely.”
Ostwald, too, thinks that markets may be making too much of the current upheaval, pointing to figures released earlier this week that showed the economy grew 0.6 percent in the first quarter — the fastest of any G7 economy. Even if that exaggerated the economy’s actual strength, he said, “there is a great deal more resilience in the economy than the media narrative conveys.”
However, both acknowledged that even the best outcome will require months of drift until the leadership issue is settled at Labour’s annual conference in September, leaving the pound, gilts, and the FTSE all at the mercy of not just a party civil war, but trade and shooting wars too.