Why borrowing costs are Burnham’s biggest problem

0:02Sky News, the full story first.

0:11Andy Burnham's first big test isn't a vote in Parliament or even PMQs. It's whether he can keep his promises without alarming the people who lend Britain money. And this is why.

0:32Hi everyone, Neil here in our Westminster office today because Andy Burnham has just faced his first Prime Minister's questions. Higher borrowing costs are the biggest threat to family finances. So will he rule out any more borrowing that will make people poorer? We are taking the action needed to get debt down. This will be a government grounded in fiscal responsibility. It will stick to the fiscal rules. Get debt down, stick to the fiscal rules and bring down the cost of living. Now that is quite the three-part promise, particularly when the cost of government borrowing is going up. Let's be clear, this isn't just about the UK.

1:15Borrowing costs around the world have been driven up by the conflict with Iran, rising oil prices and fears about inflation. But Britain already owes almost£3 trillion. and Chancellor John Healy has his first budget to deliver next month. So has the bond market already rewritten the budget? Can the Prime Minister keep all three of those promises? And if he can't, who ends up paying? Ed Conway, Sky's economics and data editor. Ed, look, I mean, obviously Andy Burnham has had a day of it with Prime Minister's questions, but arguably the bigger problems that he is facing are taking place outside Parliament and it's all to do with the economy.

1:55What's going on?

1:56Ed Conway:I think actually that overshadows everything else. And I think that they're conscious of that. And the story is basically bond yields. And before anyone kind of switches off, I promise this is both, it is kind of interesting, but it's also just incredibly important because it is hard to think of another set of statistics that are more consequential for the economy. Right now, the 10-year bond yield in the UK, the gilt yields it's called, it's up at 5.3%, highest that it's been since 2008. The 30-year is getting close to 6 % now, highest it's been since the late 90s. And you put those together, and that feeds into everything.

2:35Ed Conway:It feeds into higher interest rates for us, potentially Bank of England interest rates, and it feeds into higher interest rates for the government, which means it just doesn't have as much money to spend. And so Andy Burnham, who's often said, shouldn't be so in hock to the bond markets. Well, all of a sudden, the bond markets are saying, we are here, we matter, we have consequences, what are you going to do about it? But the key thing here is, we've all got the scars, news scars from what happened back in 2022, when guilt yields after the mini budget went up very sharply. And as a result of that, you had this financial destabilization in the UK.

3:09Ed Conway:The UK was not exactly totally on its own, but we were definitely having our own big problems there. This time around, it is a very international story. So They're going up in the US. They're going up in Japan. Japan has the highest rates since 1996 at the moment. They're going up in Germany. They're going up in France. They're going up basically everywhere. Who is setting this interest rate? And actually, who are we getting this money from? This is the market. So you've got millions of people out there every day taking decisions. It's financial advisors. It's asset managers. It's the people who are managing your pension, my pension, all of that.

3:42Ed Conway:Those people are taking decisions. They're looking at that portfolio. They're looking, OK, how much of that are we going to allocate into equity, shares? How much of that are we going to put into bonds? So there are all of these people making decisions on a day-to-day basis, deciding whether they're going to put that money more into this country, more into that country. And take that all, multiplied by millions, if not billions of decisions every day, and you have the market. So when we talk about the market, that is basically the collective manifestation of a lot of people making decisions about where they're going to allocate money, how much they're going to borrow, how much they're going to lend.

4:16Ed Conway:And the market, which, like I say, is lots of different people. It is not a single person. Andy Burnham is talking about being a hock to the bond markets. What does that mean? It means this enormous flood of people making decisions every day. But that market right now is charging more to lend to governments. And like I say, not just the UK, governments around the world. But the UK, and we can talk specifically about this, we are definitely at the upper edge of everyone else. So why? What are the factors that are playing into this particular market that mean we are, what, 30-year yields approaching 6%, as you say, highest since 1998?

4:54Ed Conway:There's a lot of things. The most straightforward explanation is if you look at all of those lines, you know, look at where the UK's gone, where everyone else has gone, they all start to spike up after the 28th of February when we saw what we're seeing now in the Gulf. So you see the attacks on Iran, you see the Strait of Hormuz being closed. And there's straightforward explanations for that. The straightforward one is, well, look, oil is more expensive. Gas is more expensive. It costs more to get this stuff out of the straits if you can get it out of the straits. When something's more expensive, that means inflation is higher.

5:26Ed Conway:When inflation is higher, that means governments and central banks around the world are going to raise interest rates to try and bring down inflation. And keep interest rates higher. And keep interest rates higher. So the key thing about this and the reason why these numbers are the most important statistics in the world, it's because whenever the prevailing borrowing weight goes up, it feeds into everything. You say that this is happening around the world. Clearly it is. This is a global phenomenon. But is there perhaps an aspect to the interest rates that we are seeing in this country specifically down to some of the stuff that has been announced by Andy Burnham?

5:58Because he spent the summer promising the earth.

6:01Ed Conway:In short, it doesn't look like it at the moment. It doesn't look like there's a very UK specific movement. But I mean, famous last words, you never know. And actually, to me, that was the interesting dog that didn't bark back in the summer, you know, when it started to become clear that Andy Burnham was heading for office. A lot of people had wondered before, given what he'd said, famously, he said, we shouldn't be so in hock to bomb markets. A lot of people wondered, OK, are the markets going to react and punish the UK? Are they going to look at what he's saying about nationalizing water companies, which is an incredibly expensive thing to do if you want to do it, you know, 100 billion pounds or more?

6:31Ed Conway:Are they going to react badly to the fact that Rachel Reeves, who on the few moments in the last few years when it looked like she was going to be booted out, there was a bit of a market reaction. But that didn't happen this time around. Clearly, the UK is affected by all of this like everyone else. And like I say, we are an outlier and have been since 2022 and having slightly higher than everyone else is. But it doesn't look like everyone's fretting and saying, gosh, this new government, I'm just not buying UK stuff. But that's not to say they might not start to change their minds in future. If you look back in the last few weeks about the noises we had coming out of Andy Burnham and to some extent John Healy.

7:07Ed Conway:Of course. And then what they've actually done when they've come into office. There's a big difference, isn't there? They've come into office and all of a sudden, no, no, no, this is continuity. Isn't partly that down to the fact? I mean, you said a moment ago that we're all in the same boat. It's an international phenomenon. But I'm going to challenge you slightly in the sense that aren't we quite vulnerable in the United Kingdom to this sort of thing because of the underlying vulnerability that we possess? You know, we're what? We're three trillion in debt at the moment. We have a high national debt.

7:32Ed Conway:I mean, other countries have higher national debts. And the US is rising even faster than ours. Weak productivity? We've got a real growth problem and have done for some time. And it's not altogether obvious that, you know, when we're talking about this a few years ago, Keir Starmer coming in and saying we're going to have the fastest growing growth in the G7. And then all of us boring, dismal economists. I'm not an economist. We're all kind of saying, oh, well, there's just no way that's going to happen. They're like, oh, you know, poo-poo. Actually, that's exactly what happens. We haven't had great growth recently.

8:01Ed Conway:But then by the same token, Europe has serious growth issues as well. It's not just the UK. But I think we are in a vulnerable place. And I would say in a more vulnerable place than most other countries. Kind of just because of the institutional memory that we had a near bond market crisis back in 2022. And those things just don't go away. There's a scar tissue, like a mental scar tissue that stays there for a long time. I talk to people in the markets quite a bit. and they still tell me that was a profound moment because you often know theoretically and there's all this talk theoretically about this country being close to the edge.

8:39Ed Conway:What is the edge? We don't kind of know what the edge is. Like what happens in the event of a crisis? You generally just don't know. You just are nervous that you're getting towards it and you see signals in the market. The UK found out that cliff edge and basically to some extent went over it back in 2022. and when that has happened people just are always going to be nervous and so to some extent if you're talking about a global bond market moment which it looks like we're in at the moment then the UK it just so happens that we're the ugly duckling and it doesn't mean that we are in deep deep trouble but it does mean that you tread more carefully and like I say that's what John Healy has done he came into office he's come into the treasury and he has been briefed by treasury people saying just be careful.

9:24The tone has changed but I thought situations like this are why we have that headroom. We've talked about this concept in the past that there is a buffer not exactly cash in the bank but you've got money allocated just in case things happen.

9:37Ed Conway:So what is headroom? It's not a bundle of money that you have. No. It's basically you've set yourself various fiscal rules and the key thing is those fiscal rules change all the time but nonetheless, you've set yourself a rule and the rule says, I'm going to borrow to that level, or I'm going to have the national debt go up to that level. And what's happened here is that this government has inherited Rachel Reeves's rules, which by the way, she changed from the last guys, but you know, nonetheless, that sets a ceiling. That's for another podcast. It sets a ceiling. All the headroom is saying is we've borrowed up to a certain amount.

10:08Ed Conway:There's still this gap between this self-imposed ceiling and where we are right now. But the key point here is because your interest rate's higher, because that feeds into the amount that you need to pay an interest in the coming years, then all of a sudden that room that it looked like the government had against its own fiscal rules, that's been diminished seriously simply by interest rates without them doing anything. That's quite chastening because that then reminds Andy Burnham that he's coming into office and there are serious constraints on how much he is going to spend. And a lot of those constraints, like I say, they're self-imposed.

10:41Ed Conway:The previous government imposed the manifesto pledge saying they weren't going to raise various taxes. Rachel Reeves imposed this constraint saying we're only going to borrow so much and we've got these fiscal rules to prove it. But nonetheless, it's very hard once you've imposed those kind of things to break them without people getting more nervous than they would otherwise get. Okay, but rising borrowing costs and diminishing headroom, that basically means government can't do everything that it wants to do. This makes it, what, more difficult for him to deliver? I think it makes it more difficult, unfortunately, for him in two respects.

11:11Ed Conway:First of all, if you're talking about cost of living, well, what the markets are pointing towards is higher interest rates, which bears down on your cost of living. It's higher inflation potentially, which increases the cost of living and makes it harder for people. So unfortunately, there's that. And then on top of that, his room to do anything about it is smaller than it would otherwise be. Like I say, this is not a verdict on Annie Burnham, but certainly you've got the bond markets coming in here and saying, literally in his first day in parliament as prime minister saying we exist and it's very hard to find a way around us and the reason why in the uk by the way you can't just be dismissive about this stuff is ultimately we depend on that financing if you don't have that then this country isn't able to spend on the salaries of people working in the nhs and so on so you need to try and work out a way of getting that money somehow.

12:05Ed Conway:And right now, it's not easy. But I mean, that's governing. And that's the world that Andy Burnham now finds himself in. It's not campaigning anymore. It's not just coming up with easy, interesting ideas, which is what has been happening for the last few months. It's actually working out how to make the sums add up and make the country sustainable.

12:35Keir Starmer came to be known for the U-turns that he performed. I mean, do the Prime Minister and Chancellor have to go back to the drawing board on, let's just list some of the promises, targeted energy support? We could see that costing around£2 billion. He's talked about bus fares. He's talked about house building. He's talked about reforming social care, greater public control of essential services. All of that is going to cost cash, cash that they don't have. Are we about to see some significant U-turns from the summer promises?

13:00Ed Conway:I think we've already seen some of the U-turns. I mean, like, this is the challenge. A lot of those things that Andy Burnham has talked about, social care, reforming social care is incredibly expensive. You can get billions. And it's also politically difficult. There are deep-seated problems with our tax system no one really wants to confront. The way we tax property, the way we make it a properly redistributive tax system that is fair, it is complex. It could desperately do with an overhaul. We've got council tax bans that date back to the 1990s. It's crazy. There are lots of crazy things. Stamp duty is a bonkers tax in many respects.

13:35Ed Conway:But whether this is going to be the government, which is going to look at all of that stuff and say, these are the deeply entrenched, difficult things, the triple lock and the question of how you're going to finance welfare in the future, particularly pension spending, because actually a lot of it is pension spending and incapacity benefit. That stuff is hard. and the question everyone is asking themselves back to the bond markets the question people in the bond markets are going to be asking themselves right now is we spent the last two years looking at this government which had a massive majority a landslide majority and realizing that hold on they're incapable of actually making the difficult decisions that the uk needs in order to generate more growth in the future is this lot going to be any more capable of doing it and the jury is slightly out, but the initial signs are that they're not going to be radical about it.

14:22Ed Conway:So I think we'll see what markets think about that. We're a handful of weeks away from the budget. I mean, what can John Healy do without breaking manifesto commitments not to raise taxes? What else is there? Well, I think one of the things that looks quite plausible is a tax on banks. You couldn't fill that entire hole with it, but you could raise a bit. There might be taxes that you could potentially do on energy companies? Although the Wimful tax is already a big thing for everything that's happening in the short term, doesn't it? I mean, I can think of things, a closer relationship with Europe, you can see growth coming in the medium to longer term.

14:56Ed Conway:Well, maybe a bit, but it's not like Europe has massive growth right now. No, no, totally. But as suggestions for a treasury that is short on ideas right now, I mean, massive infrastructure investment. But again, that's medium to long term. In the short term, genuinely, beyond taxation, is there anything else? They've actually committed to a lot of infrastructure spending under Rachel Reeves. Probably, depending on what happens next, which is the key thing, that might be the key legacy of the Starmer government is that they took public investment from a relatively low level, at least in the long term previously, to being quite a bit higher.

15:28Ed Conway:The difficult thing, okay, is if you're the treasury and you're like, well, there's this hole we need to fill. And your minister, your chancellor says, okay, how do we fill that? They're like, well, minister, there is this investment spending. You could just take that money that you were going to spend on the motorways and rail and everything else and put that into that column. And all of a sudden, the hole is gone. Isn't that magic? But then all of a sudden, those growth positive policies that were the centerpiece of the Starmer government are gone. That means your government is no longer investing big stuff in the future.

16:05Ed Conway:It's filling holes today. I think there might be a bit of that as well. It just feels as if all of the positivity that Burnham has tried to inject into politics might be gone like that when he sits down with a calculator ahead of the budget with John Healy, has a look at what they can do and what they cannot do. I'm worried, but I'm more worried about deeper international things. I'm worried that we've got more wars around the world than we've had for many decades. I'm also actually optimistic about the fact that we're living through an era where we've got an industrial revolution happening right now in the form of AI and to some extent as well in the form of various different renewable energy technologies.

16:42Ed Conway:There's a lot that's happening that's really growth positive and a lot of opportunities, like genuine opportunities for the UK as well, if only the UK could grasp them. There are worries, and actually they're really scary worries. There are hopes which we haven't had for a long time. How many people get to live through an industrial revolution? Not many. And we are going through that now. And it's going to be bumpy, but there are opportunities. But by the same token, where the UK sits in that is still kind of up for grabs. There have been many scarier points for the UK economy than we're right now.

17:12Ed Conway:So there is genuine hope, but we're starting from a tough place. Thanks as always to Ed. Do remember to get in touch with your thoughts on what you've just heard, why at sky.com, and keep an eye out for Ed's new book, Trade World, out later this month. That's your lot for today. We're back tomorrow.