Ultimately, it is the government that needs to find around £2 billion a week to close the gap between what it spends and what it takes in taxes. International investors, who currently hold almost a third of all UK government debt, are under no obligation to continue lending to it.
In addition, said managing director of Fathom Consulting Erik Britton, even Burnham’s back row has problems.
“The UK is in the bond market because it has borrowed from them,” Britton said LinkedIn. “Claiming that we should not be ‘confused’ is like claiming that you intend to default. That is not a good move for a prospective Prime Minister.”
Regardless of the outcome of any leadership bid, investors seem to be worried about the latest iteration of the British political disease characterized by fear and simplistic responses in the face of difficult economic realities and difficult to change: population aging, inequality, geographic fragmentation and environmental degradation.
“Any new prime minister will be subject to the same constraints that the current government faces,” Bill Papadakis, chief investment officer at private bank Lombard Odier, wrote in a note to clients.
Papadakis noted that for all the drama of the past two years, Starmer’s government has managed to reduce the budget deficit and the current account deficit, and said that “major changes in the financial situation are not immediate or very likely.”
Ostwald, too, thinks markets may be weathering the current turmoil, pointing to figures released earlier this week that showed the economy grew 0.6 percent in the first quarter – the fastest of any G7 economy. Even if that exaggerated the real strength of the economy, he said, “there is much more stability in the economy than the media reports.”
However, both agreed that even the best outcome would require months of slippage until the leadership issue is resolved at Labour’s annual conference in September, leaving the pound, gilts, and the FTSE all at the mercy of not only a civil war, but a trade war and bullets too.
