What happened in the budget?
Last week Rachel Reeves delivered the Government’s latest budget. It arrived amid a fog of leaks — some accidental, others clearly not — and a week of breathless speculation about market panic.
In reality, there was a modest increase in the interest rate the Government pays on its borrowing. But rates are still around half a percentage point lower than their peak earlier this year. Despite the hysteria, markets barely flinched. In fact, rates even drifted down again yesterday.
Look closely and the movement is actually quite boring. There’s variation, yes — but within a narrow band. Most of what people are panicking about is just the “random walk” you expect in any complex financial system.
The UK isn’t an outlier compared to other similar economies:
This matters, because around 8% of all government spending now goes on debt interest. The lower the Government can push the cost of its borrowing, the more it can, in theory, spend on the NHS, social care and rebuilding a hollowed-out welfare state.
Why debt interest really matters
Debt interest isn’t some abstract number buried in Treasury spreadsheets. It is real money that doesn’t go to nurses, schools or fixing collapsing roads.
Even tiny changes in yields can mean billions of pounds moving from public services to bondholders. Which is why financial markets are obsessed with UK government debt — and why politicians are terrified of upsetting them.
Austerity and the fiction of fiscal responsibility
During the 2008–09 credit crunch, government debt ballooned as failing banks were effectively nationalised. Their liabilities were added to the state’s balance sheet, and the Government took equity stakes in return.
When the coalition came to power in 2010, it had two broad options:
- Grow the economy and gradually reduce debt over time, including selling bank shares.
- Slash public spending — austerity — to force debt down more quickly.
This was never really an economic choice. It was ideological. A deliberate attempt to shrink the state.
George Osborne claimed it worked. It didn’t. It worked on paper because of accounting tricks; most notably, student loans were kept off the government balance sheet. Eventually, that debt has to go somewhere — and it will land back on the state’s books.
If you include student loans, austerity didn’t reduce debt. It cemented it.
How the OBR created a £20bn problem
Osborne’s other gift to the future was the Office for Budget Responsibility. In theory, it provides independent forecasts. In practice, it became another pillar in the architecture of austerity.
In the 2025 budget, the Government had to raise taxes by more than £20bn — not because the economy had worsened, but because the OBR changed its assumptions about future productivity.
That single technical tweak knocked down estimated growth and created a new fiscal “hole” that had to be filled.
If that sounds insane, that’s because it is.
It’s even more absurd given that chronic underfunding of government departments means the underlying data can be wrong. Earlier this year, HMRC discovered it was £3bn out on its own VAT calculations.
QE, QT and the real distortion in UK bond markets
After the financial crash, the Bank of England launched Quantitative Easing (QE) — creating money to buy bonds and stabilise the system.
Officially, it was about credit. In reality, much of that money flowed into housing and asset markets. Hence the long, politically convenient boom in property prices.
Now the Bank is doing the opposite: Quantitative Tightening (QT). It is selling those bonds back into the market.
This matters, because it pushes up gilt yields (government borrowing costs). The current level of UK government debt interest is therefore partially the result of official policy distorting the market.
As the Bank of England slows its bond sales, borrowing costs should fall.
But there is a sting in the tail.
Less QE also means less cheap money sloshing into mortgages, at the exact moment the Government is ramping up house-building. The equation that fuelled two decades of rising house prices is breaking down.
The housing market warning nobody is talking about
The long house-price boom is coming to an end.
And that matters politically, because rising house prices are one of the strongest predictors of electoral success for incumbent governments.
When prices fall, governments fall.
Which leads to a deeply uncomfortable conclusion:
If house prices drop sharply, the next man in Downing Street could be Nigel Farage.
History suggests voters don’t punish the bond market. They punish whoever happens to be standing outside Number 10 when it all goes wrong.
https://tradingeconomics.com/united-kingdom/government-bond-yield
https://tradingeconomics.com/bonds
Any thoughts on how the right wing press has branded it the “Benefits Street budget”?
That was inevitable. The scary thing is how much racism is being brought into it – white taxpayers paying for muslims with huge families.
Personally I think it is a good move. If you want to grow the economy giving money to poor people works well as they tend to spend it locally, rather than have foreign holidays, buy french wine or german cars.
I missed that Islamophobic angle you pointed out there, although it certainly makes sense if they wanted to attack the lifting of the 2-child benefit cap!
https://www.facebook.com/photo/?fbid=1543152883661759&set=gm.24584002534607643&idorvanity=663436603757571
What’s in that link? (I deleted my Facebook account in November 2024.)
Couldn’t post a screen shot, it’s a racist meme about Muslims claiming loads of benefits without working