Prompted by the fact that the country seems to be on the brink of getting its seventh prime minister in ten years, there has been much commentary over the past few days as to whether Britain has become an ‘ungovernable’ country. And, if so, why that might be.
A variety of possibilities have been put forward. An impatient and unrealistic voting public. An ineffective civil service. The corrupting influence of foreign money. Social media driving people apart. And so on.
One part of the puzzle is arguably the difficult fiscal situation in which governments from both parties have found themselves in recent years. The fact that government borrowing is still elevated post-COVID, coupled with taxes already at multi-decade highs, means there is very little capacity to meet the desire to improve public services which are creaking at the seams. In these terms, it is a very nasty hole in which we find ourselves.
The favourite to be next prime minister, Andy Burnham, has certainly picked up on the public’s frustration. In an interview last year with The New Statesman, he railed against the perceived timidity of Sir Keir Starmer’s government and said the country had to “get beyond this thing of being in hock to the bond markets”.
For the sake of clarity, the bond markets are where the government goes to borrow money – so this comment caused some concern. This is especially the case, of course, as we have all seen up close as recently as four years ago what happens when a government pays insufficient attention to the bond markets. Yes, the 2022 ‘mini-Budget’ fiasco.
Now is a particularly bad time for investors to have to question the UK’s credibility on such matters, because fresh data shows that the bogeyman of inflation is once again making its presence felt.
We must wait one more day for the April inflation data here at home to be released, though March’s figure already increased thanks to the effects of the war in Iran. However, April numbers for the crucial, influential US economy are already available and do not paint a pretty picture.
Consumer prices were 3.8% higher than in April 2025, the fastest pace of growth since May 2023. Nor was this all about oil prices. Core inflation, which strips out the effects of food and energy prices on the very basis that they are volatile, also rose, to 2.8%. This was the highest figure in six months. Meanwhile, input costs for businesses increased by 6.0% year-on-year. This was the biggest increase since March 2022, in the immediate aftermath of the Ukraine war.
Unsurprisingly, investors in government bonds have noticed all this and are now charging higher rates to lend to governments. The interest rate on a 10-year loan to the American government last week hit its highest level in over a year. Here in the UK, the equivalent rate is now at its highest level since 2008.
With this backdrop as the starting point on inflation and yields, any new government must be careful about what it says and does. So it is encouraging that Andy Burnham has come out over the past few days to clarify his previous remarks and make clear that, if he does take over, he will continue to adhere to the fiscal rules set down by the current Chancellor.
Sticking to these rules might not be exciting, and might understandably frustrate those who are impatient to see change across the country. However, at a time when the bond markets have the UK under close scrutiny, keeping this foundation in place is a sensible move – whoever the prime minister is.
