If Labour sticks two fingers up to the bond market, Britain will pay the price

“They go on the news, the commentators and pundits and say: ‘How will the markets react? What about the markets?’ Well, who elected the markets? Not me. Who runs this country? Us, or the markets?”

These were the words of Eddie Dempsey, boss of the RMT rail union, at the Durham Miners’ Gala in July. Dempsey’s views are shared by many on the Left of British politics, including dozens of Labour’s massed ranks of backbench MPs.

What Dempsey is effectively saying is that the world’s sixth largest economy should default on its £2.9tn of sovereign debt, equal to 96pc of annual GDP.

That would be insane. But I can tell you from many conversations over several years that “forget about the bond markets” is the view of a significant chunk of Labour’s 230-odd backbenchers, and even some of the 175 MPs who are ministers or otherwise on the so-called government “payroll” vote.

These people seem to view servicing and repaying sovereign debts not as an absolute necessity, but as a political choice. That’s why Andy Burnham recently expressed disdain that Labour is “in hock to the markets”.

The Manchester Mayor was trying – in words he later said were “misinterpreted” – to impress economically illiterate MPs and Labour activists. One day, he hopes, perhaps quite soon, they will help him to dislodge Keir Starmer as both party leader and Prime Minister.

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And even Chancellor Rachel Reeves, in her second Budget Statement last Wednesday, showed signs of the Labour tribe’s tendency to “forget about the markets”.

Yes, she is seen as “Right-wing” by many Labour MPs. And when Reeves recently showed signs of emotional distress in the House of Commons earlier this year, UK gilt yields spiked with global investors rightly concerned that, if she is pushed out, her replacement could be an even bigger spender and borrower.

But for all of Reeves’s “fiscal responsibility” rhetoric, the Budget day fine print shows an almighty ramp up of government borrowing and spending over the rest of this Parliament. And there are some deeply buried forecasts that look more than incongruous, while playing a vital role in making the sums add up on paper, so Reeves can meet her much-discussed fiscal rules.

Reeves faced a tricky inheritance from the Tories. In July 2024, when Labour took office, the national debt was already north of 90pc of GDP, with taxation at a 70-year high. Yet, while she took on a difficult situation, as Chancellor, she has made the UK’s shaky post-Covid balance sheet far weaker, not least last Wednesday.

In her October 2024 Budget, Reeves raised taxes by a massive £40bn a year – the most fiscally punitive Budget for more than three decades. She then said, repeatedly over many months, that she was “fixing the foundations of the economy… this is a once-in-a-generation Budget… I won’t be coming back for more”.

But her tax rises crushed growth, with hiring sharply down and Labour’s statist nostrums sparking a mass exodus over the past year. An astonishing 639,000 people left the UK during the 12 months to June, according to ONS data released last week – many of them replaced, of course, by unskilled immigrants and their dependents.

These dramatic demographic trends, amidst paltry GDP growth and Labour MPs’ refusal to countenance even very modest controls on runway welfare spending have seriously further undermined the UK’s balance sheet over the last year.

And now, in this Budget, Reeves has performed a near-repeat of last year’s Budget, with taxes rising by around £30bn a year – a combined near £70bn annual tax increase within the first two years of this Labour Government.

And yet, despite all this extra cash, Reeves once again just massively increased UK borrowing. She didn’t say that in her speech, of course – but the numbers are there in the technical documents released alongside the Budget.

During the five years from 2025 to 2029, the UK Government is now on course to borrow £75bn more than was forecast as recently as March 2025, according to the OBR. That’s serious money – equivalent to a jaw-dropping 9-10p increase in the basic rate of income tax.

And yet, in the final two years of the OBR’s forecast period borrowing suddenly plunges and then turns negative – with the UK apparently planning to run the country’s first annual Budget surplus in over a quarter of a century in 2030.

Is such a scenario credible? I don’t think so. Reeves’s borrowing numbers emphasise the idiocy of fiscal rules which bite only in five years’ time and which stand or fall on what are essentially made-up forecasts. And, while the Thanksgiving weekend means financial markets have been quiet since Wednesday, I’ve been in touch with some serious bond traders over recent days and eyebrows are being raised.

With lots of extra borrowing over the next three years, and extra taxation mainly happening from 2028, Reeves has gone for evermore spending now, with the pain pushed back until later in this Parliament. But will a Labour government really be able to impose serious fiscal consolidation just ahead of an election? Again, I don’t think so.

It’s a massive bet on our creditors’ patience, on growth emerging amidst ghastly anti-growth policies and, above all, on inflation not spiking and sending gilt yields – which have already been way above the Liz Truss “mini-Budget crisis” peak for months – shooting up even more.

This is a Labour Budget for Labour MPs and the party nomenclature – including Eddie Dempsey. But Reeves’s Budget could yet end up seriously roiling the markets. And then we’ll see who’s boss.