What is Labour’s biggest headache this week? You might think the answer is the world’s richest man taking digital potshots at Keir Starmer. But there’s an alternative contender: the bond markets.
Yesterday’s debt auction saw the government pay interest of 5.2 per cent on 30-year bonds – the highest level since May 1998. That reflects a number of factors: stubbornly high inflation (which has slowed interest rate cuts), weak UK economic growth, and anxieties over a second Donald Trump presidency.
The primary cause is less important than the effect: higher debt interest costs (which already stood at 3.9 per cent of GDP). The more Rachel Reeves spends on servicing government borrowing the less she has for everything else. That’s a serious problem when departments are already competing for scarce resources.
On 26 March, Reeves will deliver her Spring Statement to the House of Commons. The risk is that the accompanying forecast from the Office for Budget Responsibility will show that she is on the verge of breaking her fiscal rules (Capital Economics estimates that the Chancellor has already lost £8.9bn of her £9.9bn “headroom”).
Put this threat to the Treasury and they are clear that Reeves’ fiscal rules are “non-negotiable” and that she does not intend to repeat the tax rises seen in last year’s Budget. That leaves one alternative: new spending cuts (or “rooting out waste in public spending” as a Treasury spokesperson puts it).
Even before recent events, the fiscal climate was already nightmarish for Reeves. Remember that the Budget showed spending on unprotected departments – justice, transport, environment, local government and others – falling by 1.3 per cent in real terms from April 2026 onwards (a matter of deep anxiety among cabinet ministers).
The hope inside No 11 was that better-than-expected growth might ease the fiscal arithmetic but so far the reverse has proved the case. And even as spending capacity shrinks, spending demands are growing.
Start the new year with a New Statesman subscription from only £8.99 per month.
Also yesterday, Trump used a Mar-a-Lago press conference to repeat his demand that Nato members increase defence spending to 5 per cent of GDP (up from 2.3 per cent in the UK’s case). Even if Britain and others seek to meet Trump halfway, that means devoting billions more to defence.
The overriding challenge for Labour is clear – the government has staked its political reputation on improving public services. That isn’t only about spending more money but – after a decade of austerity – it is an unavoidable corollary. Yet unless growth improves, Labour will be forced to consider whether more cuts and tax rises are needed (avoiding a Truss-style meltdown is Reeves’ overriding priority).
No 10’s chief of staff Morgan McSweeney has observed that Labour does not know who its main opponent at the next general election will be – the Conservatives or Reform? For now, you could argue, the biggest counter to Labour is the bond markets.
“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter,” James Carville, Bill Clinton’s former chief strategist, once observed. “But now I would want to come back as the bond market. You can intimidate everybody.”
Inside the Treasury, Rachel Reeves has been served a reminder of just how true that is.