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The UK faces some of the highest borrowing costs in the developed world, but former UK Chancellor of the Exchequer Jim O’Neill says the bond market offers four key lessons the government can adopt to solve the problem.
Speaking on CNBC’s Squawk Box Europe, the former economist and head of wealth management at Goldman Sachs said the UK government needs to stop obsessing over social media and “the next 24 hours” and instead focus on the big issues facing the country.
This comes as British government bonds (known as Gilt) came under intense selling pressure on Tuesday amid growing calls for Prime Minister Keir Starmer to resign. Although Mr Starmer insists he is not going anywhere, Britain could soon have a fourth leader in the coming years.
“We have to get rid of the triple lock,” O’Neill told CNBC, referring to Britain’s state pension, which is guaranteed to increase every year on the highest of three metrics. Consumer price inflation rate, average revenue growth rate, or a minimum of 2.5%.
“We have to do something about the grossly misallocated welfare benefits,” he added. “We have to do something substantive about how we tax the housing market, and we have to do something to stop the persistent belief that no matter what happens, more and more government money will be spent on rising costs for the NHS.”
“That’s not sustainable.”
British bonds initially rebounded on Wednesday morning, but reversed after borrowing costs rose to generation highs in the previous session. However, yields then turned into positive territory and then fluctuated around a flat line.
The situation has once again become volatile amid reports that Health Secretary Wes Streeting is preparing to resign. A subsequent BBC article claimed that his political allies had told the broadcaster that he planned to stage a leadership coup as soon as Thursday.
Mr Street has previously been reported to be keen to take the top job in the government and is widely seen as the frontrunner to replace Mr Starmer.
Benchmark yields rise in London by 12:47 p.m. 10 pension It fell less than 1 basis point to trade at 5.095%.
uk 10 pension
The day before, 10-year Treasuries rose 9 basis points, the highest since 2008.
Bond yields and prices move in opposite directions, and traders often demand higher yields on bond investments when confidence in the government that issues them is shaken.
Mr Starmer’s leadership is in flux after his party’s poor performance in last week’s local elections led to widespread calls for his resignation from MPs.
By Wednesday morning his position appeared more stable. Ninety MPs from the ruling Labor Party have called for the Prime Minister to resign, while more than 100 have signed a statement supporting Starmer to remain in office.
The prime minister has repeatedly refused to resign, saying he intends to see his job through and pointing out that no candidates have formally stepped forward for his leadership.
Commenting on rumors of a potential leadership fight, O’Neill added that he needed to be “a little more mature” in how he approached domestic disputes.
“The country’s leaders are being treated like a game show,” he said. “The Conservative Party went down this disastrous path and now Labor wants to try it too.”
Bond markets have largely supported Mr Starmer and his Chancellor of the Exchequer Rachel Reeves to maintain their positions against potential alternatives, with bonds sold in the past due to uncertainty over their political futures.
On Wednesday, yields fell across the curve in early trading as Mr Starmer’s chancellorship began to look sustainable, but volatility resurfaced in British bond markets by the afternoon in London, with the BBC reporting that Mr Streeting could mount a leadership challenge as early as Thursday.
yield 20- and 30 years Gold prices, which have been hovering near their highest since 1998, hovered near a flatline on Wednesday afternoon. It was trading slightly higher at the end.
UK 20 and 30 pensions
Many traders have raised concerns about the potential for a more left-leaning policy mix if Starmer is replaced. Former deputy prime minister Angela Ryder and Greater Manchester mayor Andy Burnham are the frontrunners to replace Starmer. Mr Rayner and Mr Burnham (who is currently ineligible to stand for prime minister as he has no seat in parliament) are widely considered to be more left-wing than Mr Starmer.
Absent Mr Starmer’s resignation, a challenge to the Labor leadership – which would determine Mr Starmer’s fate as party leader – could only be triggered if 20% of Labor MPs support a challenger. This currently means 81 Labor MPs will need to support a replacement candidate.
Britain already has the highest government borrowing costs in the G7, with yields on 10-, 20- and 30-year government bonds well above the key 5% threshold.
