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On January 13, 2025, the spread between the yield on 10-year gilts and German Bunds reached 230 points. This was four points higher than the peak reached on September 27, 2022. when Liz Truss was prime minister. The UK is probably not going into a debt crisis. But its status is weak. The government must strengthen confidence in the UK’s common sense and common sense.
Interest rates have risen across the G7. Even in Germany, the long-term 30-year Bund yield rose by 290 basis points between January 15 2021 and January 15 2025. In the US, the rise was 300 basis points,’ and France 350 points. Alas, the rise in UK yields was the highest in the G7, at 440 points. UK yields on 30-year gilts reached 5.2 percent in mid-January. This was the highest level in the G7, with Germany’s output at just 2.8 percent and France’s at just 3.9 percent. But US yields were not far off the UK level, at 4.9 per cent, possibly due to a large deficit in the world’s top economies.
Overall, UK yields on long-term debt have risen significantly and reached higher levels than peer countries. Yields on 30-year gilts were 56 basis points higher than Italy’s on January 15. Moreover, while UK yields were up 78 basis points last year, Italy’s I did not rise at all. That is embarrassing.
The important question is why the prices have gone up. The biggest change was in the real rate of interest, not inflation expectations. In the case of the UK, we have strong secondary measures, from index-linked and conventional products. The difference between the two reflects inflation expectations and the perception of inflation risk.
These data show that real rates in the UK went from -3.4 at the beginning of December 2021 to a peak of 1.3 percent on January 14 2025. One can interpret this as normalization after the rate period. very depressing reality. The decline in real interest rates is largely consistent with the rise in yields on conventional gilts, indicating that changes in inflation expectations have been surprisingly small.
So, what do these real and nominal products tell one about the stability of the UK public debt? If the debt-to-GDP ratio is to be stabilized when the real interest rate exceeds the economic growth rate, the government needs to manage the primary fiscal deficit (the balance between revenue and spending first to the payment of interest). A real rate of 1.3 percent allows for a modest core deficit if growth remains higher than that. IMF data show that this was exactly the growth rate of the UK between 2007 and 2024. Hence, debt sustainability requires stable primary balances. Happily, according to me Office of Financial AccountabilityIn reviewing the October Budget, the main budget is forecast to run a surplus of less than 1 percent of GDP in the last three years of the decade. This will be consistent with a tight stabilization of the ratio of gross debt to GDP, as the OBR reflects in its debt estimates.
The implication is that the situation is manageable. However there are risks. One is that real and specific global interest rates could rise further, perhaps due to further jumps in investment or protectionist spending, or increased awareness of more political risks. , finance and finance. A particular weakness of the UK is that the country has a persistently large capital account surplus, making it highly dependent on foreign capital, unlike say, Japan. This is also true in the US. But the latter is the lender of the whole world.
Another risk for the UK is that GDP growth, which is already low, could slow further. The politics of managing basic incomes may not be possible. Yet another danger is that the ratio of net debt to GDP is now close to 100 percent. This is not low. Comfortably, it is below the standards of Japan, Italy, France and the US. But it is much higher than it was two decades ago. Finally, there is the “danger of Trump”, especially the threats of higher tariffs against the open economy no longer within the EU.
In short, the UK’s position is weak. The government needs to maintain the trust of its creditors. It is important that we do not follow principles that raise doubts about their good understanding. The way taxes were raised in the Budget did that. So, again, make regulatory reforms, especially in the labor market. The government will have to confirm its views current currency in its next review or consider higher taxes.
The UK must focus on stability and growth. There is no need to panic, but the era of cheap loans is over. Policy must be responsive.
