If Labour lurches to the Left, the market mayhem will make Truss fiasco look like fiscal rectitude: ALEX BRUMMER

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Economics, it has to be said, is rarely Labour’s strong suit.

The party’s Manchester mayor, ‘King of the North’ Andy Burnham, betrayed his ignorance of matters financial some weeks ago when he airily opined that governments should not be ‘in hock to the bond markets’.

Former transport secretary Louise Haigh, meanwhile, has urged the Chancellor to ‘break free’ from the Government’s fiscal rules, as if these were arbitrary guidelines rather than strictures dictated by the laws of the market.

The truth is most Labour MPs – products of the trade unions, political bag-carriers or ex-local councillors as they typically are – understand ­little of how or why governments borrow, and care even less. If only they did.

Ultimately, there is one ­simple way for governments to avoid the bond markets that make or break political administrations and that is to live within their means rather than borrowing money to fund spending on welfare and other voter bribes.

But that is not the Left-wing approach. As Bill ­Clinton lamented to his economic advisers in January 1993, weeks after he had been elected President: ‘You mean to tell me that the ­success of my programme ... hinges on a bunch of f***ing bond traders?’

Indeed it does. And these same bond vigilantes, who trade governments’ debts in the global marketplace, have already shown how little they favour the tax-and-spend approach of the current Labour regime – which has undermined business confidence, halted consumer spending, hobbled the housing market and caused thousands of entrepreneurs to flee overseas. 

Rachel Reeves’ first Budget in October 2024 saw the price of government debt spike – and rates have remained high since

Rachel Reeves’ first Budget in October 2024 saw the price of government debt spike – and rates have remained high since.

Rachel Reeves’ first Budget in October 2024 saw the price of government debt spike – and rates have remained high since

Yes, the ructions in Westminster are grimly enjoyable, as it seems yet another Prime Minister is about to be ­defenestrated. But far more significant for the long-term health of the country is the kind of administration that will replace Starmer.

And, here, let me make a prediction. The financial markets will unleash mayhem when – as is inevitable – Britain takes a turn to the Left.

Even before Starmer has stepped down from the Downing Street lectern after delivering his resignation speech, gilt yields – the ­interest rate on British ­government debt – will spike to levels that will make the 2022 Liz Truss fiasco look like a parable of fiscal rectitude.

We had a taste of this on Monday, when Scotland’s Labour leader Anas Sarwar launched his ill-fated coup attempt against the PM. Yields briefly leapt and the pound wobbled. Starmer rallied his Cabinet and the temporary survival of this incompetent Government provided the markets with a reassuring glimpse of stability.

All this would get a darn sight worse under a more Left-wing leader – who, to see off the threat of the hard-Left Greens – would embark on a socialist programme to make Jeremy Corbyn blush.

They would surely seek to follow the economic model of the railways and renationalise water companies, power and gas networks, the steel ­industry and anything else they could get their hands on – destroying Mrs Thatcher’s great privatisation drive, which was unchallenged even in the Blair-Brown era.

The nation could kiss ­goodbye, too, to any effort to curtail the bloated welfare budget, while the bill for health benefits would surge to more unaffordable levels.

Worst of all, untrammelled trades-union power would cripple British enterprise and productivity. Under Starmer, the unions have secured above-inflation pay rises in the NHS and across government, with no improvements to productivity. 

Enhanced ‘worker rights’, the pet project of Angela Rayner (favourite to be the next PM), have also been imposed, to the fury of businesses keen to preserve Britain’s competitive labour markets.

When Scotland’s Labour leader Anas Sarwar launched his ill-fated coup attempt against the PM, yields briefly leapt and the pound wobbled

Paying for all this would be expensive and taxes on companies, inheritance, capital gains and much else would soar. But the Government would find, as governments always do, that beyond a certain threshold, tax increases do not increase revenues.

Instead, individuals and firms modify their behaviour – taking on less work or fewer staff, passing gifts to children or delaying selling assets, to lower the tax burden.

Thus the traditional Labour disease of a ‘wage-price spiral’ will begin, leading to ­rocketing inflation, a return to ‘emergency’ interest-rate hikes and ultimately a deep slump and job losses.

The bond markets know all this. The vigilantes smell economic and financial weakness and are pitiless in their dealings. 

As I recently wrote in these pages, by the standards of the rest of the G7, Britain’s ‘debt to gross national ­product ratio’ – essentially a formula for calculating the output of the whole economy – should be sustainable, at just under 100 per cent.

But a big-spending socialist government following Starmer would explode that overnight. The yield on Britain’s ten-year bond jumped to 4.51 per cent during Monday’s wobble.

The yield on 30-year bonds, at 5.42 per cent, is now at its highest since the ­needless uncertainty that preceded Rachel Reeves’ disastrous second Budget last November.

Britain is peculiarly at the mercy of the bond raiders. Late last year, the Bank of England issued a bleak warning that as much as £100billion of our debt is held by hedge funds, much of it highly leveraged.

Gordon Brown’s government was blown out of the water by the financial crisis, which the ‘prudent’ son of the manse had failed to see coming

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These self-styled ‘masters of the universe’ treat the debt very differently from the British banks, pension funds and other asset managers who hold it. The hedgies use it as a speculative asset to trade – while conventional investors hold the bonds under strict regulations.

I mentioned that Labour MPs tend not to understand economics so it’s no coincidence that history shows how financial crises tend to be a fixture of Labour governments. Clement Attlee’s hardline state control after the war led to hugely expensive devaluations of the pound in 1949 which ultimately caused voters to reject his socialism and re-elect Churchill in 1951.

In 1967, under Harold ­Wilson, the pound was again devalued – while as a young reporter in 1976 I covered James Callaghan’s humiliating bail-out from the International Monetary Fund.

Three decades later, Gordon Brown’s government was blown out of the water by the financial crisis, which the ‘prudent’ son of the manse had failed to see coming. Brown’s successor at the Treasury, Alistair Darling, soon imposed big tax rises – the start of the ‘austerity’ programme.

There were hopes, after the political chaos and inflation that afflicted the Tories following Brexit and Covid, that Starmer and Reeves, enjoying their vast majority, might offer some sensible economic policies. Instead, their tenure has seen unrelenting tax rises – more than £60billion over just two Budgets. This has sparked volatility on the bond markets that, as I say, now threatens to engulf the Labour government that replaces this one.

Time and again, we have seen Labour’s instinctive lurch towards socialism is never the answer. The question is: will anyone in the party develop some economic literacy – and avoid repeating the same mistakes?