“We Are In This Terrible POSITION!” | UK Borrowing Costs Hit Highest Level Since 2008 Market Crash

Added: 2026-05-19

[00:00:00]But let's talk about how it impacts you and me with Paul Johnson, former director of the Institute for Fiscal Studies who joins us now. Good afternoon to you, Paul.

[00:00:08]>> Afternoon.

[00:00:08]>> Thank you very much. Well, what a morning. And a lot of us thinking they would have gone slightly differently so far. We are still in a destabilized government though. There's no doubt at all things are not all settled. What impact does this have big picture and how it impacts our pound in our pocket?

[00:00:24]>> Well, uncertainty, political uncertainty is bad for the economy. It's bad in all sorts of ways. And we we've seen that over the last few years. We saw it um around the Tory shenanigans and the Liz Trust mini nonsense and all of that kind of thing. Um uh the big immediate impact we've seen is an increase in our borrowing costs. Our borrowing costs are already higher than those for pretty much any other country reflecting all sorts of issues in the UK. Higher inflation over a long period of time, political uncertainty and lack of growth. Um today I mean literally over the last 24 hours but actually over the last four or five days we've seen borrowing costs rise and I think that's rising because markets are worried about well what would happen um if we didn't have K star would we have someone who was uh less concerned about our fiscal situation than Rachel Reeves and potentially someone who uh put in place policies which are even less growth friendly than those that this government have. So, what's the consequence of higher borrowing costs? Well, uh for the government, it just makes everything harder because they're spending more on debt interest and uh they're already spending just colossal amounts. Well overundred billion pounds a year because we've got so much debt. That is what this government inherit.

[00:01:42]>> But let's clarify that£100 billion a year is interest on that's just we're not paying off the debt. It's like we've got an interestonly mortgage. We're not actually paying off the actual just the interest. And I mean that On that front, the government, you are right to say they've had a pretty shocking inheritance. Um that is largely not their fault. That is the um the pile of debt they inherited. Um and uh and interest rates are probably a little bit higher because of some of the things this government's done. But that's not again not broadly their fault. Uh but the higher interest rates that are resulting from this um instability uh is just adding to that cost. It's adding to it's it's adding probably a billion or two but actually the difference between what we pay in interest rates and what say France pays in interest rates that's costing us 10 billion plus in addition >> uh interest payment >> and we we pay we this thing I mean we talk about this debt I mean we it's not like you're going to the bank this is this is the government they sell these bonds sort of you know was it three year five year and 10 year bonds and they and they're on the market basically you know would someone like to you know lend us money and we can then spend it instead of uh instead of having to raise taxes more. Um and and we a lot of our borrowing now is borrowing to pay the interest on the other debts. We're kind of in a payday loan scenario, aren't we?

[00:03:03]Um >> that's I mean that's it's worth stopping there that you're absolutely right. I mean we are in this terrible position where we have to as you say borrow just to pay back the interest on the debt and we are having to um raise more in tax uh than we're spending which is really not something that we've done for a very long time. Of course that doesn't make people very happy because the government's taking more from them than they're giving back.

[00:03:28]>> Right. So okay and yes a lot of people feel like well taxes are at a very you know a very very long period of high but but the when when we when we sell when the government sells these bonds on the on the on the international bond markets when we are charged more and a lot more but than other countries and it goes up I mean speculation you can see all the graphs today with suddenly a big spike is that a load of spibs in their red braces going yeah bunch of lefties want to get in charge of the government we know how to show them we're going to make some money out of them and buy a new Lamborghini.

[00:03:58]Is that what's going on or are there genuine concerns about the future of our economy if different policies are followed?

[00:04:06]>> No, I mean it's it's genuine stuff. I mean, you know, the the the the people in the um in these markets are um judging risk and they're they're judging what they need to be paid to lend to us um in order to make it worth that chance. Now, it's not just because they think that uh you know the UK is likely to totally default on these uh on these debts. I think that remains reasonably unlikely, but I think they are worried that we end up with more borrowing. So, you know, they have to buy more of this stuff. Higher inflation if you have a government which isn't worried about the deficit or which is uh not pursuing sensible um policies. And of course, if inflation's higher, then you need a higher return um on what you're uh lending uh to uh lending to people. So, this isn't a sort of, you know, uh people sort of just wanting to have a go at a government.

[00:04:58]>> It's not a game. It's it is real. So, it's not because they're leftwing. I mean, they I mean, they took terrible fright at Liz Truss and no one is going to accuse her of that.

[00:05:07]>> No, indeed. But is it when you get the Andy Bernhams who has said he's tried to calm things down on this since but when Andy Bernham has said it a little while ago you know we shouldn't be in hawk the bond markets well you don't really have a choice when we've got is it two billion trillion no not two billion we've got two trillion pounds in debt and that's and I mean a heck of a lot of money I mean lot I mean some of that's from you know the the economic crash and then of course uh borrow you know those that period and then of course uh the the lockdown who knew printing money and and making everyone stay at home for years uh and not doing anything would have actually had that economic impact.

[00:05:39]Ukraine war bailouts, the you know energy bills and now where we are of the Iran conflict. So there's a lot of different things that have all come together in terms of we hear a lot about these fiscal rules um that Rachel Reeves the chancellor has and this fear that I mean I I find this concept difficult but that there could be someone worse than Rachel Reeves as the chancellor. But I'm willing to accept that Ed Milliban would be worse. But this idea that you relax the fiscal rules, what are those fiscal rules and what would that mean?

[00:06:06]Well, I mean the fiscal rules at the moment essentially say that debt um should be falling in in the year 202930.

[00:06:13]That's the very specific rule. And that we should be borrowing only to invest um in that year. Now, they're not terribly tight fiscal rules. Um that would still allow debt to be very high um and it still allows debt to be increasing over the next couple of years and it doesn't say anything about what happens after that particular year. And because they're forward-looking um you can, I'm afraid gain them. So, uh, we should start by saying the current rules we have are not terribly tight. A lot of people talk about these terribly, terribly tight rules. They're really not. Um, uh, if you to loosen them, um, then obviously that means you're intending to borrow more than the current government is intending to borrow, which means you need to go begging to the markets for more for them to buy more of that debt. And they might they might well want more return if they've got to buy more of this stuff.

[00:07:00]It's simple supply and demand. If you um if you increase the um uh if you increase the supply um if you increase the if if the demand is if you want the demand to rise, you need to give people more money to take it off your hands.

[00:07:15]>> If you were in charge, you don't do the party political stuff. You've always staying completely neutral. You you know, you just judge it on the facts. If you were in charge, what could any leader, any government of any political hue or any someone who takes over from KTO all or KO right now, what could they do that would turn things around for the British economy? Well, I think there are I I mean there actually genuinely a lot of things and I think one of the really disappointing things about this government and and the last one is that they haven't used the majorities that they've had to make those sorts of changes. So, we know that there's a pile of regulations that need simplifying. Uh we know that the tax system needs improving and and simplifying. We know we need to get more houses built, need this planning system um sorted out. We know we need to invest in our um infrastructure. Now, these don't happen in large part because they're politically difficult, not because they're economically um difficult. And as I say, I think you given that we're two years into a government with a huge majority, it's genuinely disappointing that they haven't used that opportunity to do it. as frankly it was with the last government also with the big majority. I think they're all all looking at the sort of dayto-day um the the and you can see why when prime ministers fall every 5 minutes but they looked at the day-to-day popularity of individual policies rather than putting in place a program which makes a difference over parliament or two.

[00:08:34]>> But but that's the issue isn't it? And I know I know you've got to go so this be the last point but but this is the issue we've got we're up against countries you know like China and like Russia who can plan on a much longer period because they're not having to worry about these things. But we've also got a a country that is, you know, the taxpayers. We won't allow any politician to be honest with us about the fact that we are living way beyond our means and have done for quite a long time and that at some point whether we like it or not, we're going to have to tighten our belts and people don't want to hear it.

[00:09:02]>> I think that's a real that that is a genuinely big problem. I mean, that's why all the parties were so disingenuous in their manifestos two years ago. um all claiming they didn't need to raise taxes or cut spending knowing that they would. Um nobody's willing to say that you need to pay more in order to invest in the future. Nobody's willing to say that maybe we need a bit less generous with the welfare state. Nobody's willing to say that um you know that that maybe pensioners shouldn't be getting the triple lock. I mean all of the parties seem to be agreed on these things and they all seem to want to and again it is to some extent our fault for saying that these are the things that we insist on having and you you you immediately get these backlashes when policies are changed. Now, I think the mistake that politicians make is to try and do them sort of almost half-heartedly or one by one rather than say, "Look, here's the narrative. Here's the issue. Here's the big set of things that we're going to do. We know this is going to make us unpopular in the short run, but we're trying to do the right thing." Actually, when you look at times in the past in this country, I mean, you look at um you look back to the 19, whatever you thought of Mrs. Thatcher, I mean, you know, she she she drove an agenda through. You look at what happened in places like New Zealand and Sweden and Germany, they've done big uh reforms, Canada as well. They they take they they they they prepare the reforms. They prepare a narrative. They explain why they're doing it and they big changes, not you small things.

[00:10:32]I'm I'm your your listeners may well disagree with me. I I actually thought, you know, what Rachel Reed was trying to do on the winter fuel allows, what she's done on farmers farming taxation, what she's done on what she tried to do on um disability benefits, I thought were perfectly sensible, but quite small.

[00:10:47]>> There'll be people booing you right now.

[00:10:50]>> Really irritated a whole load of people because that wasn't done as part of a bigger package and a narrative about why she was doing it.

[00:10:56]>> Okay. Absolutely fascinating. I think I think you lost the room on the last one, but >> I'm sure I didn't. Bill Johnson, always so good to talk to you. Thank you so much. Former director of the Institute of Physical Studies.