The race to replace Jeremy Hunt as Chancellor of the Exchequer is heating up, and the stakes could not be higher. With UK government borrowing costs at their highest in decades, sterling sliding against the dollar, and the Bank of England caught between inflation and recession, the next occupant of Number 11 Downing Street faces a fiscal nightmare.
The candidates are circling, each promising a return to 'fiscal discipline' and 'British values.' But what does that actually mean in a market that has lost patience with Westminster’s penchant for spending?
Let’s start with the facts. Gilt yields have been on a one-way trip north, with the 10-year benchmark flirting with levels not seen since the mini-budget crisis of 2022. The market is effectively sending a message: the UK cannot afford its ambitions. The next chancellor must convince the bond vigilantes that the days of free money and deficit-obsessed policymaking are over.
The IMF’s latest fiscal outlook for the UK was less than flattering. It highlighted a structural hole in the public finances that will require either deep spending cuts or tax hikes. Neither is a vote-winner, especially with an election looming. Yet the alternative is even worse: a loss of confidence that could trigger a full-blown sterling crisis.
Then there’s the inflation problem. While headline CPI has fallen from its double-digit peaks, core prices remain stubbornly sticky. The Bank of England’s monetary policy committee is in a bind: raise rates further and crush what’s left of growth, or hold steady and watch inflation expectations become entrenched. The next chancellor must work in tandem with Threadneedle Street, not at cross-purposes.
What does ‘British values’ mean in this context? It sounds like a campaign slogan, but the markets will be looking for details. A commitment to sound money, perhaps? A return to the spirit of Gladstonian finance? Or simply a recognition that you cannot borrow your way to prosperity when the bond market is already gorging on gilt yields?
The danger for the Conservatives is that they are running out of time. Labour is ahead in the polls, and shadow chancellor Rachel Reeves is doing her best to sound fiscally responsible. If the Tories choose a candidate who spooks the markets, they risk handing Labour the keys to the Treasury on a silver platter.
So who will it be? The early favourite is someone who can speak the language of the City while keeping the party faithful happy. That’s a tall order. The next chancellor needs to be a hawk on spending, a dove on tax, and a master of spin. In other words, a unicorn.
Let’s hope the winner understands that fiscal discipline is not just a campaign promise; it is the only path to stability. Otherwise, the pound’s decline will be the least of our worries.
