For better or worse it looks like Rachel from Accounts is living on borrowed time – or at least that’s what the right-wing press are saying, and I tend to agree. The crux of the matter seems to be the UK government have been playing to the UK audience, but forgetting that the rest of the world can hear them too. They have a large majority and can’t be removed from office via the ballot box until 2029, so they probably felt safe no matter how things went. BUT, as Liz Truss discovered to her cost, the people who really run the country are not the politicians, but the international money markets. And their impact can be much more immediate – and brutal.

The problem is this: every year, in order to run the country, the Government needs to raise enormous sums of money – a lot more than can be raised through basic taxation. So to make up the gap they have to borrow additional cash in loans from other countries. These loans are in the form of Bonds, with the interest rate (called the Yield) payable on the bond being fixed when the bond is purchased. The yield is negotiable between the lender and the Government. If the lender has a high degree of confidence they’ll get the money back, then the yield will be low – say 1%. On the other hand, if the lender has a few doubts they’ll want more in return – say 5% – for what they perceive is a higher risk. This yield is important since it has a direct impact on things like the interest rates everybody pays, including mortgage rates and the government has to find even more money to cover loan costs.

So in the case of Liz Truss, with her unfunded tax cuts, they all set a very high yield and the rest of her MPs kicked her out in favour of somebody a little more sensible. (Actually it was a little more complicated than that, but not much).

Fast-forward to summer 2024. In the run-up to the July election the Labour Party made a number of statements and assurances to the public that they wouldn’t raise public spending by very much, that they’d not increase income tax, VAT or NS contributions, and a key policy was to grow the economy. The public believed them, as did the money markets, and they were duly elected with a large majority.

Unfortunately, once in power that’s not what they actually did.

1. After winning they then spent much of summer 2024 saying what a bad state the economy was in after the previous government. This included the claimed £22bn ‘black hole’ in the finances, which may, or may not have really been the true figure.
   Serious point: it’s generally a bad idea to talk yourself down in this way. People tend to believe things are worse than they are.
2. They then awarded large pay rises to various groups in the public sector.
   Oops – they’re raising public spending already.
3. It then became clear that the Chancellor had been a bit careless with her CV, and had nothing like the economic experience she claimed to have.
   Oh dear – the driver is a novice.
4. Then they increased the employer national insurance contributions. Everybody still seems to be arguing whether this actually broke their manifesto commitments, but either way it’s a LOT of money to extract from the taxpayers and it makes employing people more expensive.
   This is a strange way to grow the economy!
5. Then they made family business and family farms subject to inheritance tax.
   In fact, there may be a case for some redistribution of land, but this seems to be ill thought through, driven by dogma rather than by pragmatism.
6. The removal of the winter fuel allowance for state pensioners and the adding of VAT to private schools were not manifesto commitments and in practice are unlikely to raise much money, despite having a negative impact on children and old people.
   Again this appears primarily driven by dogma and is badly thought out.

All of this tends to give the impression that the UK might not be a particularly safe place to invest money in. What they want to see is a well run economy with a government on top of things. Unfortunately this government doesn’t do what it said it would do, is driven by dogma and then it looks like the Chancellor doesn’t have very much experience.

Bond yields are now well above the Liz Truss level, and still climbing. This is really not good, and strongly suspect Mrs Reeves will be toast very soon!

So all this begs the question, who governs Britain?