Inflation risks are taking Britain towards the debt-crisis cliff edge

Telegraph

4 hours ago

The UK's consumer price index was 3.6pc higher in June than the same month last year – significantly above the Bank of England's 2pc inflation target. The broader retail price index rose even more, by 4.4pc.
Unemployment is also up, hitting 4.7pc during the three months to May, a four-year high. And last week's double dose of downbeat data came against a backdrop of broader economic weakness, with GDP having shrunk in both April and May.
It's now screamingly obvious that Labour's crude Keynesianism – 'pump priming' the economy by upping state borrowing and spending – isn't working. Worse than that, this Government's actions are pushing Britain towards a budgetary crisis every bit as serious as that in 1976, when the UK was forced to go 'cap in hand' to the International Monetary Fund for a bail-out.
Chancellor Rachel Reeves's higher tax rates have been hammering economic activity, causing tax revenues to fall. Yet Labour's leadership, driven by ideological fervour and fearing the party's increasingly strident far left, keeps pushing spending up regardless.
The sharp rise in the rate of employer National Insurance contributions (NIC) has caused hiring to plunge since it was announced in last October's Budget, undermining NIC revenues overall. Labour's higher capital gains tax (CGT) rates mean investors aren't selling assets, causing CGT revenues to plunge.
A far more punitive non-domicile tax regime and much higher inheritance tax on businesses has sparked an exodus of wealthy individuals, with countless UK entrepreneurs moving abroad.
The top 1pc of earners generate 30pc of all income tax receipts, with the top 5pc paying almost half. But when you push the seriously rich overseas with a student-politics tax regime, they often stop investing and close their UK-based businesses. So the revenue loss goes way beyond income tax, spreading across the gamut of employment and corporate taxes too.
As a former asset manager, I talk to many senior people at the global pension funds, insurance companies and other institutional investors that lend governments serious money. They ask me about UK politics and public policy and I ask them what they are doing and why. So when I say financiers are not only deeply unimpressed but seriously alarmed at this Government's actions, that's directly from the horse's mouth.
Anyone remotely financially literate can see investors are demanding ever higher returns to bankroll this increasingly spendthrift Government. The interest rates our Government pays to borrow are now at their highest level since the late 1990s, but on a far greater volume of debt.
The UK's benchmark 30-year gilt yield last week breached 5.5pc – and has been way above 5pc for the whole of this year. Borrowing costs, then, are consistently much higher than the 4.85pc peak they momentarily touched during Liz Truss's 'mini-budget' crisis in October 2022. Yet the broadcast media's reaction, hysterical back then, is now ridiculously complacent. Draw your own conclusions as to why.
Last August, just after Labour took office, the 30-year yield was below 4.5pc. Since then, increasingly sceptical investors have pushed it a full percentage point higher. During this same period, the Bank of England has cut its benchmark borrowing cost from 5.25pc to 4.25pc, a percentage point in the opposite direction.
'Market rates' and 'policy rates' moving against each other are a clear sign of brewing systemic danger. The warning signals are flashing red, yet almost no one in a political and media class addicted to government spending wants to acknowledge what's going on.
In April 2024, the Office for Budget Responsibility (OBR) forecast the Government would borrow £87bn over the subsequent 12 months. When that financial year ended in April 2025, the figure was £148bn, an astonishing 70pc more. Endless discussions about whether 'fiscal headroom' in 2029/30 is £5bn or £10bn is utter displacement activity. We can't even get within £60bn of our borrowing estimate within the current financial year.
The reality in front of us is that Britain borrowed £148bn last year and £110bn or three quarters of that increase in our national debt went on interest payments on debt previously incurred. Our public finances resemble a Ponzi scheme.
Reeves and Keir Starmer cite crowd-pleasing nonsense about 'school breakfast clubs' and 'world-class public services'. As if it's fine to drive the UK into bankruptcy, provoking a full-on bail-out and all the resulting financial and economic chaos because the money is being spent under virtue-signalling headings.
'Borrowing costs are going up around the world', bleat fresh-faced government spin doctors. Yes, but UK gilt yields and total debt service payments are now easily the highest in the G7. Plus, much of the private money invested in UK gilts is 'levered' – or also borrowed.
And when the backers of the Government's backers get worried, as they now are, they will eventually 'margin call' creditors, igniting a sudden and self-reinforcing sell-off that sends yields and economy-wide borrowing costs into orbit.
On top of all that, Britain is a stark outlier when it comes to the share of 'index-linked' state debt – with regular interest payments rising in line with RPI inflation. Around 30pc of UK gilts are 'linkers', compared to just 12pc in Italy (the G7's next highest) and 5pc in Germany and the US – reflecting long-standing market concerns about vast UK government off-balance-sheet liabilities, not least the trillion-pound-plus bill for still insanely generous pensions for state employees.
Britain's sky-high share of index-linked state debt, a long-standing ruse to keep headline yields as low as possible, is coming home to roost. As inflation rises, debt service costs ratchet upward, resulting in ever more borrowing to pay those costs as our tax-strapped economy struggles.
That's why, when last week's higher-than-expected inflation number emerged, yields rose sharply. The UK is close to the debt-crisis cliff-edge – and ministers can't say they weren't warned.