The numbers are stark. Public sector net borrowing for the current fiscal year has surged to levels not seen since the darkest days of the pandemic, sending gilt yields spiking and reminding investors that fiscal discipline remains a mirage. The Office for National Statistics confirmed this morning that borrowing reached £17.4bn in April alone, nearly double the Office for Budget Responsibility's forecast. That brings the rolling twelve-month total to £274bn, a figure that would have been unthinkable before Covid shattered the Treasury's spreadsheets.
The Chancellor, who has staked his reputation on a return to prudence, now faces a fiscal reckoning. The market is voting with its feet. Ten-year gilt yields jumped 12 basis points on the release, pushing the cost of servicing the national debt to a crippling £110bn a year. That is more than the entire defence budget. The arithmetic does not lie. When you borrow to pay interest on past borrowing, you are not managing the economy. You are running a Ponzi scheme.
The root cause is a combination of stubbornly high inflation, which inflates the nominal value of debt servicing, and anaemic growth forecasts. The UK economy grew just 0.1% in the first quarter, lagging behind every major G7 peer. Tax receipts are rising, but not fast enough to cover the gap. The Chancellor's fiscal headroom has evaporated. The so-called 'fiscal rules' are now little more than political theatre. He has already broken his promise to have debt falling as a share of GDP. The only question is how long he can kick the can down the road.
Capital flight is an underappreciated risk. International investors are increasingly skittish about UK assets. The pound has weakened 3% against the dollar this month, and foreign holdings of gilts have fallen for four consecutive quarters. The UK now runs a current account deficit of 4% of GDP, meaning we rely on the kindness of strangers to fund our profligacy. If that kindness dries up, we could see a sterling crisis of the sort that forced the UK into the arms of the IMF in 1976. The mechanisms are different today, but the vulnerability remains.
The Chancellor's options are narrowing. He could raise taxes further, but that would choke off what little growth remains. He could cut spending, but that would be political suicide for a party already trailing in the polls. He could hope for a miraculous recovery in productivity, but hope is not a strategy. The most likely outcome is that he does nothing until the market forces his hand. Then he will be forced into an emergency budget, with all the chaos that entails.
The Bank of England is caught in the crossfire. It is trying to fight inflation with high interest rates, but the fiscal expansion is working at cross purposes. The central bank's quantitative tightening is adding to the pain, as it offloads gilts into a market that is already saturated. The credibility of both institutions is on the line.
This is not a crisis yet, but it is a warning shot. The bond market vigilantes are stirring. The Chancellor would do well to remember that they never sleep. The bottom line is simple: the UK is living beyond its means, and the bill is coming due. Whether the Chancellor has the courage to present it remains to be seen.
