It’s 2010 all over again. British government bonds are front-page news. The media is breathlessly reporting about potential IMF bailouts. Kemi Badenoch even compared the UK to Greece yesterday afternoon during Prime Minister’s Questions.
It’s certainly true that yields for 30-year British gilts are rising. They are about 10% higher than they were when Liz Truss was PM, and 20% higher than when George Osborne was talking about preserving Britain’s credit rating. However, we need a little perspective.
As a sovereign country, with control over its own currency, the UK is never going to default on its debt printed in pounds. The reason why Britain was bailed out by the IMF in 1976 was because it needed access to foreign currency to cover debt payments in dollars and import the goods it needed. This time around, “IMF-style” bailouts will not prove necessary.
The cost of our debt is also not unsustainable. UK debt interest payments are equivalent to 4.5% of GDP. This is higher than in recent memory, but it has been higher in the past and the UK has been in harder financial positions in the postwar and interwar years than it is today. The real reason why debt costs are spiralling is because markets are hedging against inflation.
Inflation in the UK is starting to move out of sync with other major developed economies, particularly the rest of Europe. The reason for this is that the British economy is incredibly imbalanced. The UK has always been a big importer of goods from overseas, but it always used to take funds from financial services, insurance and other “invisible earnings” to pay for those. However, since the early 2000s we have seen ballooning levels of imports — and exports have not kept pace. In 2024, the balance of payments deficit (the cost of all imports minus exports) was £76 billion.
This deficit means that the pound continues to get weaker compared to the dollar, euro and other major currencies. In turn, this increases labour costs, driving higher levels of inflation. Debt holders want to make sure that their bonds are not inflated away, so are demanding higher premiums. It is this economic imbalance, not Chancellor Rachel Reeves, that is pushing our debt costs up.
Yet the press continually falls into the trap of reporting on debt markets as if they are people voting in a reality TV show, when really government bonds are just the symptom of a wider problem. Politicians and journalists convinced themselves that the economy was essentially self-managing and that our trade would “balance” itself over time. This has proven to be false.
The British Government needs to get back into the nitty-gritty of economic management, ensuring that the UK is able to pay its way in the world — making the things other countries want and manufacturing more of what we need ourselves. Chancellors of a bygone era would have instinctively understood this. Rebalancing our economy, not the behaviour of bond yields, is what Reeves should be judged on.