Why the financial markets have just issued a warning to Labour over a lurch to the left
Investors are nervous that the impending downfall of Keir Starmer could see Labour resort to recklessly high spending
As the pressure on Keir Starmer to announce his resignation continued to mount, the financial markets made their growing worries about where this might lead crystal clear, with the UK Government's long-term borrowing costs hitting the highest level in 28 years.
While any kind of uncertainty about a country's leadership tends to make investors jittery, there can be no ignoring their central message: however Labour resolves the situation, it cannot result in the abandonment of Chancellor Rachel Reeves' "fiscal rules" and a shift towards the hard-left, with reckless spending, borrowing beyond our means or crippling tax hikes – or a combination of all three.
Neil Wilson, investor strategist at online trading company Saxo UK, said: "In the event of a new leadership ticket, there is a risk of additional government spending on cost-of-living measures, such as support for rising energy bills, increased minimum wage, benefit uprating and a rental freeze, among a range of potential help mechanisms. It would be a toxic combination for gilts [government bonds] – higher spending, lower growth and inflation becoming embedded."
However, given the central criticism of the current Labour government has been a lack of progress on measures that make people feel like their lives are getting better rather than worse, the temptation to roll the dice and try a new, more radical approach will be considerable.
The Labour left quickly turned on Starmer over plans to reduce the bill for disability benefits and other policies they disliked, and they would doubtless do the same to a new Prime Minister who tried to take a fiscally responsible approach.
What the hard-left have a habit of conveniently forgetting – as demonstrated during the economic crises of the 1970s – is that a government which wants to borrow large amounts of money has to pay attention to the cost of doing so and retain the confidence of investors.
With taxation and government borrowing already at historically high levels, there is little real option other than to fund any new spending by making cuts or finding efficiency savings. That may be hard for some to hear, but it's the plain and simple truth.
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