【Boss Economics World】Starmer's First Crisis, How Labour Triggered a Market Panic

alright class settle down settle down your favorite professor of the dismal science is back and today we're taking a field trip to the United Kingdom Circus September 2025 ah Britain the land of tea queuing and a national pastime that has recently eclipsed even football in its dramatic intensity fiscal self harm across the nation parents are dragging their Sundays children back to school their little face is a perfect picture of dread it's a scene mirrored I imagine in Downing Street where Prime Minister Kierstammer and his chancellor Rachel Reeves are facing their own version of the first day of school except their bullies aren't waiting by the bike sheds they're sitting in trading rooms from London to Tokyo and they call themselves the bond market and let me tell you folks the bond market has just handed the UK government a note from its parents that says we're very very concerned about your performance let's get straight to the headline that's causing palpitations at the Treasury the UK's long term borrowing costs the interest rate the government pays on its 10 year debt or dilts have just spiked to their highest level since 1998 now for our younger viewers who think 1998 was a time of dinosaurs and dial up internet let me give you some context 1998 was the year of the Russian financial crisis and the collapse of the hedge fund Long Term Capital Management it was a year of global financial contagion a time when the world's economic plumbing very nearly backed up and flooded the entire house so when your borrowing costs return to that level it's not a nostalgic throwback it's a five alarm fire the UK's 10 year yield yield is now screaming past 55 percent making it the undisputed heavyweight champion of expensive debt in the entire G7 think about that the UK is paying more to borrow than Italy a country whose political system is famously as stable as a Jenga tower in an earthquake it's paying more than France whose government is currently facing a confidence vote that could see it collapse it's even paying a hefty premium over the United States the world's benchmark whose own debt situation is hardly a picture of serene prudence the pound Sterling bless its heart reacted to this news by promptly tripping over its own feet and tumbling 13 percent against the dollar lagging every other major currency it's the kid in the school sports day race who starts strong gets a stitch and is laughed by everyone including the kid with asthma so the first question on our syllabus today is why why is the market having this connexion now to understand the panic we have to talk about the ghost that haunts the halls of number 11 Downing Street a ghost in a Union Jack dress clutching a copy of Britannia Unchained yes I'm talking about the spectre of the 2022 list trust quasi cording mini budget that fiasco wasn't just a political embarrassment it was a fundamental reprogramming of the markets brain it taught investors in the most brutal way possible that the UK's political and institutional stability could no longer be taken for granted the moron premium that was briefly slapped on UK assets in 2022 never fully went away it's now more of a political uncertainty surcharge and it's being triggered again what was the trigger this time a seemingly innocuous Downing Street reshuffle Prime Minister Starrmer in a bid to strengthen the center brought in a few new faces and hijacked his team the stated aim to give the prime minister more direct influence over economic policy to a politician this sounds like strong leadership to a bond trader it sounds like the Chancellor of the Exchequer Rachel Reeves who has spent two years painstakingly building a reputation for fiscal conservatism to exercise the ghost of corbettomics is being sidelined the market doesn't care about a stronger center the market wants to know who has their hand on the fiscal tiller and it wants that person to be the most boring predictable spreadsheet loving accountant you can possibly imagine any hint that political expediency might override fiscal discipline sends a jolt of terror through the system Home Secretary Evet Cooper can go on Sky News all day and say the Chancellor hasn't been sidelined but the price action on your screen tells you the market isn't buying it they see a potential power struggle and in that vacuum of certainty they sell this is the unforced error Team Starmer wanted to project strength and start the autumn term on the front foot talking about their shiny new childcare initiative instead they accidentally sent a signal to the markets that the grown UPS might not be fully in charge of the budget they've managed to snatch defeat from the jaws of well from the jaws of a slightly less dire situation this political wobble couldn't have come at a worse time because the UK government is staring into a fiscal black hole the size of Yorkshire the latest office for Budget Responsibility projections hot off the press for our 2025 scenario show the Chancellor needs to find 51 billion pounds not to pay for new spending mind you but just to stop the UK's debt to GDP ratio from continuing its relentless climb into the stratosphere let's break down that horrifying number the UK's debt pile is sitting at a chilling 105 percent of GDP a level not seen since the aftermath of World War II the interest payments alone on this debt are now costing the taxpayer over 110 billion pounds a year that's more than the entire school's budget let that sink in we are spending more on servicing our past debts than on educating our future so how does Chancellor Reeves fill this 51 billion pound gap ah here's the kicker during the election campaign labor chained themselves to a set of fiscal commandments the four great thou shalt nots of modern British politics 1 dot thou shalt not raise income tax 2 dot thou shalt not raise National Insurance 3 dot thou shalt not raise value added tax for dot thou shalt not raise corporation tax these four taxes account for over two thirds of the government's entire revenue by taking them off the table the government has essentially promised to run a Marathon with its legs tied together it's a fiscal straight jacket of their own design woven from the fabric of electoral promises this leaves them with a menu of deeply unappetizing options they could try stealth taxes like freezing tax thresholds for longer letting inflation drag more people into higher tax brackets a policy known as fiscal drag which has already been a silent tax raising machine for years or they could target politically sensitive areas like capital gains inheritance tax or pension reliefs guaranteeing a middle class revolt the other option austerity 20 a new round of deep painful cuts to public services that are already creaking at the seams after 15 years of underfunding with NHS waiting lists still in the millions and local councils going bankrupt the political appetite for this is non existent so Starrmer and Reeves are trapped they need to placate the bond market vigilantes by proving their fiscal credibility but their primary tools for doing so are locked in a box marked do not touch until next election now the government spin doctors will point to a silver lining on the very same day that yields were exploding the Treasury held an auction for 10 year gilts they were looking to raise a record 14 billion pounds the result the order book was over 10 times over subscribed you see they cry the world still wants to lend us money this is a huge vote of confidence in UK plc let me offer a different interpretation this isn't a vote of confidence this is the logic of a pawnshop when you walk into a market screaming that you're desperate for cash and willing to pay a juicy 55 percent interest rate a political risk premium baked right in of course you're going to find buyers Global Capital is a ravenous beast always hunting for yield offering the highest yield in the G7 is like ringing a dinner bell for every pension fund and asset manager from Frankfurt to Singapore as Ales Kotney at Vanguard pointed out UK debt looks attractive compared to Germany well of course it does a lottery ticket also looks more attractive than a savings bond if you only focus on the potential payout and ignore the risk the fact that the UK is now being compared to fiscally fragile nations rather than the gold standard of German buns tells you everything you need to know this successful auction doesn't solve the fundamental problem it just means the UK has successfully managed to borrow a huge amount of money at a punishingly high interest rate kicking the can down a very expensive road they've just signed up for another massive credit card and the minimum payments are going to be brutal this week's market tantrum isn't an isolated event it's a symptom of a much deeper chronic illness in the British economy like a patient who ignores their chest pains for years the UK is now facing a full blown cardiac event problem 1 the productivity puzzle for over 15 years UK productivity growth has been abysmal the average British worker produces around 15 to 20 percent less in an hour than their counterparts in France Germany or the US this isn't because British people are lazy it's a systemic failure of investment infrastructure and skills training low productivity means low growth which means a shrinking economic pie and less tax revenue to pay for everything problem to the Brexit drag whatever your politics the economic data is now undeniable the OBR the government's own watchdog has consistently estimated that leaving the EU will reduce the UK's long run potential GDP by around 4% that's a permanent hit to our national wealth we've seen a sustained slump in business investment and a significant increase in trade friction which acts like grit in the gears of the economy the sunlit uplands promised in 2016 are looking suspiciously like the Misty damp moors of fiscal reality problem 3 the demographic time bomb like all western nations the UK has an aging population this creates a double whammy a shrinking workforce paying taxes and a growing number of retirees drawing pensions and requiring health care the strain on the NHS and the social care system is already at a breaking point without robust economic growth to fund these services the system is fiscally unsustainable these three factors have combined to create a low growth high debt high tax economy that is exceptionally vulnerable to shocks the markets jitters aren't just about a cabinet reshuffle they are a delayed reaction to the slow motion car crash of the last decade and a half so what happens next Chancellor Reeves is now under immense pressure to deliver some forward guidance ahead of the autumn budget she needs to walk out in front of the cameras and deliver the most fiscally hawkish reassuringly boring speech of her life she has to convince the markets that she not the political operators in number 10 is in control the government is facing an impossible Trinity of choices one dot stick to their tax promises this will almost certainly mean deep politically suicidal spending cuts or a failure to stabilize the national debt leading to another market revolt to dot break their tax promises this would shatter their credibility with the electorate just a year into their term and hand a massive political gift to the opposition hope for a miracle pray that a sudden unexpected surge in global growth or a magical discovery of a productivity tree solves all their problems three dot the UK is back in the same nervous position it found itself in during the autumn of 2022 it is once again at the mercy of international investors who are looking at the country's balance sheet and asking a very simple question does this add up right now the answer is a resounding no the children returning to school this week will be learning about math history and science their leaders in government are about to get a brutal lesson in all three the unforgiving maths of a budget that doesn't balance the sobering history of what happens when governments lose market confidence and the cold hard science of economics which dictates that you cannot sustainably spend more than you earn without someone eventually sending you the Bill and that Bill my friends has just arrived the postage is stamped urgent until next time keep an eye on your guilt's and don't believe anyone who tells you there's a painless solution class dismissed