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ANDREW NEIL: The era of cheap money is over and no longer will politicians on the Left or the Right be able to promise us the moon


James Carville, the gobby political strategist who helped get Bill ­Clinton elected U.S. ­president twice, once said he’d like to be reincarnated as the bond market. 

Then, he quipped, he would be able to ‘intimidate everyone’. This sounded bizarre at the time (1994) but he knew exactly what he was saying.

The bond markets are where governments go to borrow money from ­investors (domestic and foreign) when their spending plans exceed the amount they are able to raise in tax (which they usually do).

Carville was referring to the fact that, when governments become too ­dependent on bond markets (again, a regular occurrence), the lenders rather than the elected politicians become all powerful and start to call the shots when it comes to the scale of tax-and-spend policies.

That’s exactly the situation we find ­ourselves in now, and the politicians have only their profligate selves to blame.

Yet Biden continues to run massive annual budget deficits, projected to remain at 7 per cent of GDP a year for the next five years so that the U.S. national debt is expected to be 140 per cent of GDP by the end of the ­decade, a debt-to-GDP ratio which puts it in the Italian ­premier division for red ink

Yet Biden continues to run massive annual budget deficits, projected to remain at 7 per cent of GDP a year for the next five years so that the U.S. national debt is expected to be 140 per cent of GDP by the end of the ­decade, a debt-to-GDP ratio which puts it in the Italian ­premier division for red ink

Clinton freed himself from the tyranny of the bond market by running a budget surplus, which he (a Democrat) bequeathed in 2000 to his successor, George W. Bush (a Republican), who promptly squandered it. 

Well, no major governments are running a budget ­surplus these days, least of all America. They are all (bar Germany) in massive hock to the bond markets, who are now back in the driving seat, as politicians on the Right and Left across the globe are finding out to their cost.

The world is awash with ­government debt and lenders (the bond ­markets) have had enough of it. 

As politicians here and in other democracies continued this ­summer with their familiar rounds of argy-bargy, something far more significant and fundamental took place, to which almost no ­mainstream politician ever referred: the bond markets started dumping government bonds.

Investors had looked in vain for politicians to get a grip on their fiscal incontinence, but progress in cutting budget deficits was passing slowly and national debts continued to burgeon.

The ratio of government debt to GDP (the value of goods and ­services a country produces on an annual basis) of the G7 group of the world’s major economies (which includes Britain), has stuck ­stubbornly at or near record levels.

Chancellor Jeremy Hunt realises he can't ­borrow to cut taxes. But he seems to have no stomach for spending cuts that would make lower taxes possible

Chancellor Jeremy Hunt realises he can’t ­borrow to cut taxes. But he seems to have no stomach for spending cuts that would make lower taxes possible

Some even had rising annual budget deficits (caused by expenditure exceeding revenue) which were clearly on an ­unsustainable trajectory. Leaders from President Biden to Prime Minister Sunak to Italy’s Giorgia Meloni were still adding to ­government spending.

So starting earlier this year, the bond markets began to punish politicians for their inability to discipline themselves: they sold off some of their existing bond portfolios and cut back on buying new government bond issues. 

The full fiscal consequences of this have yet to be felt but they are already severe. The sell-off was followed by a fall in bond prices, making them less attractive as investment assets.

Governments had to offer higher returns for new debt issues, ­making government borrowing much more expensive.

Following a failure of self-­discipline, governments now find themselves in a bond market straitjacket. The era of cheap money and untrammelled borrowing by politicians is over. 

More debt is no longer the easy option for cash-strapped governments.

It is a sign of the fiscal sea-change now under way that even mighty America has been caught up in it. 

At times of geopolitical turmoil the U.S. dollar is regarded as a safe haven for investors — and with wars in Ukraine and the Middle East plus a bellicose China rattling its sabre across the Eastern Pacific Rim you’d expect investors to be piling into dollar assets.

But ten-year U.S. Treasuries — the global benchmark for the ­sovereign bond market — are being dumped too, so much so that the U.S. 

Treasury is now having to offer yields of about 5 per cent (the highest since 2007) to entice ­investors to buy their debt.

The knock-on effect of the rise in this benchmark rate has been to raise mortgage and other interest rates not just in America but across the globe, including ­Britain, where the Government is also having to offer close to 5 per cent to get its debt away.

It’s easy to see why investors have lost patience with the Biden administration. America’s national debt is now approaching 130 per cent of its GDP. 

It was ‘only’ 114 per cent of GDP when World War II ended in 1945, despite the ­massive borrowing required to win that global conflict.

Yet Biden continues to run massive annual budget deficits, projected to remain at 7 per cent of GDP a year for the next five years so that the U.S. national debt is expected to be 140 per cent of GDP by the end of the ­decade, a debt-to-GDP ratio which puts it in the Italian ­premier division for red ink. 

The political consequences of the new realities now dominating bond markets will be profound, no more so than in Britain. 

Our national debt hovers at around 100 per cent of GDP. It is not expected to fall much for the ­foreseeable future.

This year we are borrowing another £112 billion or so. The annual cost of servicing our national debt has been rising fast. It could be over £80 billion by 2026/27, roughly the current defence and school budgets ­combined. 

Those who assured us we could borrow willy-nilly because interest rates were low, with no consequences to come, truly sold us a pup.

What happened to Liz Truss’s ill-fated and short-lived government now awaits all governments who resort to more borrowing to pay for their promises.

What happened to Liz Truss's ill-fated and short-lived government now awaits all governments who resort to more borrowing to pay for their promises

What happened to Liz Truss’s ill-fated and short-lived government now awaits all governments who resort to more borrowing to pay for their promises

When she tried to borrow too much to finance too many tax cuts the bond markets said ‘No’. 

They demanded a hefty premium for British bonds (often called gilts). She had to retreat — and resign. The same fate awaits anyone who tries anything similar.

The upside is that it could usher in a new period of honesty in ­British politics. No longer will ­politicians be able to promise the moon on tick.

Those on the Left who want to build their socialist nirvana via even more public spending (it already accounts for 46 per cent of GDP) will not be able to borrow their way there: they will need to tell us which taxes will rise to pay for it, taxes that will inevitably fall on people on average incomes to raise the required revenue.

Those on the Right who pine for a low-tax economy will not be able to borrow their way to it — Truss is a foretaste of what happens if you try that — they will need to tell us what public spending they intend to cut to pay for lower taxes.

With the British government spending almost £1.2 trillion a year (and rising) you’d think that might not be too difficult. But it does seem to be beyond the ken of the Sunak Government. 

We have been living through a period of big government. The pandemic, the war in Ukraine, the energy crisis which followed, now conflagration in the Middle East — all combined to produce demands for government action and, inevitably, spending.

I had thought big government would be with us for the rest of the decade. But the new mood in the bond markets could cut its lifespan short.

Our politicians have yet to ­grapple with its import. ­Chancellor Jeremy Hunt realises he can’t ­borrow to cut taxes. But he seems to have no stomach for spending cuts that would make lower taxes possible.

Shadow Chancellor Rachel Reeves, when she’s not cutting and pasting other people’s work for her latest book, thinks she’s being honest in proposing tax rises for private schools and non-doms to pay for more spending. 

But the extra revenues will be ­piddling, a drop in the ocean ­compared with the new spending Labour will demand of her.

Shadow Chancellor Rachel Reeves, when she's not cutting and pasting other people's work for her latest book, thinks she's being honest in proposing tax rises for private schools and non-doms to pay for more spending

Shadow Chancellor Rachel Reeves, when she’s not cutting and pasting other people’s work for her latest book, thinks she’s being honest in proposing tax rises for private schools and non-doms to pay for more spending

The Tories and Labour will have to come to terms with new realities. For the Left and Right there is, to quote Margaret Thatcher, no alternative. The rising cost of debt will be the drumbeat to which all politicians must march for the rest of the decade and all tax-and-spend policy debates will have to be seen through its prism.

The bond markets will exact a heavy price from any politicians who try to defy them. 

To those politicians who bridle at the power this gives investors, foreign and domestic, I say this: if you hadn’t borrowed so much in the first place to finance all your nefarious schemes, you would not now be at their mercy. 

And if you want to escape their clutches in the future, borrow less in the years to come.

 After all, President Clinton ­managed it. Why can’t you?



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