For all the talk of a 'special relationship', the markets have a cold way of pricing geopolitical risk. The news that the US Congress has voted a war powers measure for the first time, effectively tying Donald Trump's hands over Iran, sent a ripple through the Square Mile this morning. But the reaction was not panic. It was something more troubling: a weary recognition that Britain's fiscal future is now hostage to a conflict it has no control over.
Let's be clear. The Treasury is already sweating over the cost of borrowing. UK gilt yields, the barometer of our national creditworthiness, have been drifting higher in recent weeks, reflecting growing unease about the size of the deficit and the lack of a credible plan to reduce it. If American military action in the Middle East sends oil prices spiking, the Bank of England will have a devil of a job keeping inflation below target. And if inflation takes off, the cost of servicing our national debt will go through the roof.
The war powers vote in Washington is, on one level, a procedural rebuke to a President who has shown a dangerous appetite for brinkmanship. But from a British perspective, it is also a reminder that our foreign policy is increasingly disconnected from our economic reality. While Boris Johnson's government postures about standing 'shoulder to shoulder' with the US, the bond market is asking a different question: who pays for all this? The answer, as always, is the taxpayer.
Consider the numbers. The UK already spends over £50 billion a year on defence, a figure set to rise under the government's stated commitment to increase spending in real terms. Add to that the potential disruption to global trade, the volatility in oil markets, and the drag on business confidence, and you have a recipe for a fiscal headache that will not go away. The Chancellor's Budget later this year is supposed to show a path to surplus. Good luck with that.
What the market needs to hear is a clear statement of intent from the Treasury: that any escalation in the Gulf will be met with a tightening of fiscal policy elsewhere. But that is not going to happen. Instead, we get the usual platitudes about 'standing with our allies' and 'protecting our interests'. The bond market is not impressed. It wants to see the numbers add up.
Meanwhile, the capital flight story continues. Pension funds, insurers, and sovereign wealth funds are all quietly shifting allocations away from UK assets, not because of any deep hostility to the British economy, but because uncertainty breeds caution. And there is no greater source of uncertainty than the prospect of a war in the Middle East, fought by an unpredictable American ally, and funded by a British government that has run out of fiscal ammunition.
The irony, of course, is that the war powers measure is supposed to prevent exactly this kind of reckless entanglement. But in practice, it may just shift the debate from whether to the how. The President may be constrained, but the underlying tensions with Iran remain. Oil tankers are still being boarded, drones are still being shot down, and the risk of a miscalculated escalation is ever-present. The City knows this. That is why the pound is shaky and why the yield curve is flattening in a way that usually predicts recession.
In the end, the only question that matters for the Chancellor is this: what happens to the gilt market if oil hits $100 a barrel? The answer is not pretty. Inflation would spike, forcing the Bank of England to raise rates, choking off the fragile recovery, and blowing a hole in the public finances. That is the real cost of the US Congress's defiance. It is not a cost in blood, but in borrowing costs. And it is a cost that every British taxpayer will eventually have to pay.
