ANDY Burnham and Chancellor John Healey are facing a deepening financial crisis after the cost of government borrowing rocketed to a 28-year high within hours of the Prime Minister’s Commons debut.
The yield on 30-year government bonds jumped to 5.91% – easily surpassing the market turmoil triggered by ex-Tory PM Liz Truss’s disastrous 2022 Mini-Budget, when it peaked at just above 5.1%.
Ten-year borrowing costs also climbed as high as 5.29%, their steepest level since the 2008 financial crisis.
Far from reassuring markets after his maiden Commons statement on Tuesday, Mr Burnham yesterday refused to rule out further borrowing or tax rises at his first Prime Minister’s Questions.
He insisted that his government would be “grounded in fiscal responsibility”, but stopped short of committing to keep either taxes or borrowing down.
His evasiveness this week has alarmed even his allies.
Jim O’Neill, the former Goldman Sachs chief economist and Treasury minister who advises Mr Burnham informally, said his Commons performance was “the last thing” investors wanted to hear.
Lord O’Neill, who turned down an offer to join Mr Burnham’s Government but remains a strong supporter of his devolution agenda, warned the Prime Minister must now “get real” about public spending to win back market confidence.
Britain is now spending vast sums simply paying interest on a national debt the TaxPayers’ Alliance estimates has breached £3trillion.
With the Chancellor’s financial safety cushion being rapidly eroded, economists warn tax rises worth up to £14billion could be needed at next month’s Budget.
But the market fallout will not stop at Westminster – it could feed through to your mortgage, savings, investments and pension
Here, we answer the crucial questions about what is happening and how it could impact your wallet.
What is happening in the markets and why is Britain the worst hit?
The Government borrows money by selling bonds, known as gilts, to investors.
Buyers receive interest and should get their original investment back when the bond matures.
The yield is the return investors demand for lending to the Government, and when they become worried about inflation, interest rates, economic growth or public finances, they demand more.
Britain is caught in a worldwide bond sell-off, with borrowing costs rising in America, Germany and Japan too.
Higher oil prices have fuelled fears that inflation could climb again, forcing central banks to keep interest rates higher for longer.
Governments are also borrowing ever-larger sums while tech giants pour billions into AI infrastructure.
Julian Jessop, of the Institute of Economic Affairs, said investors were demanding higher returns because of “more competition for funds, including from companies making big investments in AI.” Britain also competes against US government debt, which benefits from the dollar’s reserve-currency status.
Andy Burnham’s flirtation with costly future spending commitments have also added to these pressures.
They include an estimated £18.5billion-a-year social care scheme and pledges to take more control of key public services.
Yet he has offered no clear plan to rein in Britain’s welfare bill, which is forecast to reach £400billion by the end of the decade.
Chris Beauchamp, of IG, said: “The British government doesn’t operate in a vacuum. It competes with other governments, and private companies, for the capital available to deploy by investment firms across the globe.”
He warned Britain’s “anaemic growth and uncertain spending outlooks” hardly created a compelling investment case – a verdict Mr Burnham’s shaky PMQs showing will have done little to dispel.
Why is this so bad for taxpayers and does it make Budget tax rises inevitable?
The TaxPayers’ Alliance estimates Britain’s national debt has already breached £3trillion and is growing at £4,270 every second, or £369million a day.
The Government spent around £109billion on debt interest last year – nearly 4p in every £1 it spent, more than the entire defence budget.
That rising bill eats directly into the Chancellor’s financial headroom – the buffer before the Government breaks its own borrowing rules.
Rob Wood, of Pantheon Economics, estimates higher interest costs have already slashed this from around £24billion to £13billion.
And that makes it highly likely taxes – already at the highest level since World War Two – will have to jump again to restore the buffer.
Ruth Gregory, of Capital Economics, said Mr Healey will need to find between £9billion and £14billion at next month’s Budget to “restore headroom and maintain fiscal credibility.”
But John O’Connell, of the TaxPayers’ Alliance, insisted tax rises need not be a foregone conclusion, saying: “Tax rises are not inevitable. They only become inevitable if ministers refuse to confront the real problems, such as soaring welfare spending.”
That warning echoes Lord O’Neill’s own diagnosis on Wednesday.
Speaking to BBC Radio 4, he said the market pressure meant Mr Burnham would be forced to take control of public spending, adding: “It’s going to force his own political party and hopefully the whole Whitehall system to get real about dealing with some of the things that are out there, such as the triple lock, excessive spending on welfare.”
He later said: “What this boils down to, he’s got to make some cuts in terms of government spending,” warning that successive governments had let such spending become “sacred cows that no politician dare touch.”
How could this affect my mortgage and what should I do?
Fixed mortgage rates are not set directly by the Bank of England base rate.
They are largely driven by swap rates, which follow gilt yields.
Swaps reflect expected interest rates and influence how much it costs lenders to borrow money.
Nicholas Mendes, of John Charcol, said: “When a lender offers a five-year fix, it is borrowing at the five-year swap rate to fund it, so when that rate moves, the mortgage rate follows within days.”
The two-year swap rate has risen from about 3.7% to 4.3% over the past year, while the five-year rate has climbed from roughly 3.8% to 4.4%.
Rachel Springall, of Moneyfacts, warned: “Mortgage rates could be set to soar as swap rates have jumped sharply. This does not bode well for borrowers.”
For illustration, repayments on a £200,000 mortgage over 25 years would rise by around £117 a month if the rate increased from 4.5% to 5.5%.
Borrowers whose deals expire within six months should consider securing a new rate now.
Mark Harris, of SPF Private Clients, said: “Mortgage offers are typically valid for six months, so if you are concerned that rates will rise further, it would be sensible to lock into a new deal.”
If rates fall before completion, borrowers can often switch to a cheaper offer, although they should check their lender’s rules.
A five-year fix could suit someone who needs certainty, particularly as the gap between two and five-year rates is unusually narrow.
A two-year fix leaves borrowers better placed to benefit if rates fall, but exposes them to another costly remortgage if they stay high.
Is there any good news for savers?
Higher market rates may encourage banks and building societies to keep savings deals competitive, although they do not have to pass increases on.
Savers should check their current rate and compare easy-access accounts, notice accounts, regular savers and fixed-rate bonds.
Money needed for emergencies should not be locked away.
A Cash ISA can protect interest from tax, which is increasingly important for savers exceeding their personal savings allowance.
Sarah Coles, head of personal finance at AJ Bell, said people needing their money within five years “might find they are better off in cash”.
However, inflation remains a threat because it reduces the spending power of your savings, even when the balance is growing.
What does this mean for my investments and should I move into gilts or cash?
Bond prices move in the opposite direction to yields, meaning existing gilt and bond funds can fall when market yields rise.
Long-dated bonds are particularly sensitive.
Angeline Ong, of IG, said: “A 30-year gilt has a very high duration, so a one percentage point rise in yield knocks about 20% off its price.”
New investors can now access higher yields, but bond prices could fall further if borrowing costs continue climbing.
Shares can also suffer because higher borrowing costs squeeze company profits, weaken growth and make lower-risk assets look more attractive.
However, experts said investors should not dump a diversified portfolio because of frightening headlines.
Jonathan Raymond, of Quilter Cheviot, said: “For long-term investors, particularly those saving through pensions and ISAs, it is important not to focus on short-term market movements.”
Russ Mould, of AJ Bell, added: “No one knows what is coming next, so a balanced portfolio across a range of asset classes, including shares, bonds and commodities, remains a sensible option for most investors.”
How will this affect my pension and what should I do before retiring?
The impact depends on your type of pension and how it is invested.
Defined-benefit schemes can benefit because higher yields reduce the present-day cost of meeting future pension promises.
Mr Mould said higher yields were “a massive help” for pension funds, with the 4,838 schemes tracked by the PPF 7800 index recording a combined £271billion surplus.
Defined-contribution pensions may contain bond funds whose values have fallen, although most workplace default funds also hold shares and other assets.
Higher gilt yields can improve annuity rates because insurers use bond returns when pricing guaranteed retirement incomes.
Ms Ong said current annuity pricing was “close to the best in a generation”, making it worth comparing quotes.
Anyone using drawdown should consider holding enough cash to cover one to three years of essential spending.
This can reduce the risk of being forced to sell investments following a market fall.
Annuity purchases and other pension decisions can be difficult to reverse, so consider regulated financial advice or a free Pension Wise appointment before acting.