Rachel Reeves’ exit would come with a very high price for us all

There are many reasons to criticise this government. Fiscal recklessness is not one of them.

So, to those drooling at the prospect of the end of both Rachel Reeves and Keir Starmer: be careful what you wish for. It could end up costing Britain billions. And no, I’m not kidding.

One thing I would not criticise the chancellor for is her commitment to fiscal responsibility. Labour chancellors, perhaps unfairly, face an uphill struggle when it comes to securing the confidence of Britain’s lenders. Reeves, however, has put in the hard yards.

UK bond yields – the rate the government pays to borrow – ticked up as traders returned to their desks after the weekend, but markets were largely calm because, despite the slings and arrows aimed at Starmer, none delivered the death blow. If that changes, and Reeves’ position comes under real threat, things could quickly get sticky.

The UK already has among the highest borrowing costs in the G7 because inflation is a major reason. Inflation eats away at the value of the currency, so lenders charge a premium to protect themselves. But politics matters too, and the price of a future chancellor trying to take on the City could be extremely heavy.

Some £140bn of debt is due to mature in 2026-27 and will need to be refinanced through new IOUs issued by the Debt Management Office (DMO).

Let’s say the average interest rate on all that new paper comes to four per cent. That delivers an annual interest bill of £5.6bn – money that is not available for schools, hospitals or defence. Push that rate up to five per cent and the bill becomes £7bn. Over the three years remaining in this Parliament, that is an extra £4.2bn gone.

Now consider that a further £160bn comes up for renewal in 2027-28, with another £150bn due in each of the following two years. And that is before any additional borrowing is factored in. When it comes to the national debt, the numbers get very big, very quickly.

Before economists start firing shots, yes, this is a crude calculation. We are talking about debt with varying maturities, and different bonds carry different rates influenced by different factors. But the bond markets’ view of Britain counts for a great deal.

“Bond investors have already been worried by the prospect of higher inflation linked to the Middle East conflict, and now they’re starting to squirm in their seats at the idea that we might get a different prime minister and chancellor driving an agenda of increased borrowing and spending,” says AJ Bell investment director Russ Mould.

If you want a good example of how trying to take on the bond markets can go wrong, look no further than Liz Truss.

When she became prime minister on September 6, 2022, the 30-year gilt yield stood at 3.378 per cent. Then came the now-infamous mini-budget, with £45bn of unfunded tax cuts. Within four days, the yield had surged to 4.986 per cent and the Bank of England was forced to intervene, hoovering up long-dated gilts the market no longer wanted.

Upon entering Number 11, Reeves adopted a different debt metric that presented borrowing differently. She also made clear she would borrow to invest. That can be sensible if the borrowing generates economic growth. Crucially, however, she also made it clear she would not borrow to fund day-to-day spending. That was the right call. More importantly, she stuck to it.

The concern in the City is that any replacement from Labour’s left flank would take a much looser approach. That concern is not irrational. Andy Burnham, Labour’s self-styled king across the Pennines – forgive me, I was born in Yorkshire – once declared Britain should not be “in hock” to the bond markets. It remains one of the most economically illiterate remarks I have heard from a senior politician.

Burnham’s rhetoric will do little to calm market nerves. It helps explain the queasiness whenever it appears Starmer – and therefore Reeves – may be on the way out.

Think of the bond markets as Britain’s bank manager. Imagine marching into Barclays and declaring: “I’m no longer prepared to be in hock to you and your rotten rates. Screw you.” The response would be swift: “Good luck finding another lender, sir.”

And remember this: higher gilt yields do not just hit the Treasury. They also feed through into the cost of fixed-rate mortgages. As the Truss mini-budget demonstrated all too clearly.

As former Bank of England governor Mark Carney once observed, Britain depends upon “the kindness of strangers”. The country needs people willing to lend it money. If investors lose confidence in the person steering the ship, the consequences are straightforward: credit downgrades, higher borrowing costs and less money available for public services.

Reeves’ departure would therefore come at a price unless her successor can demonstrate the same commitment to fiscal discipline. That price could run into the billions.

Those cheering her downfall should be careful what they wish for. In politics, removing a chancellor is easy. Rebuilding market confidence is not.