Britain seems reluctant to learn the lessons from Ireland’s sovereign debt crisis

Wednesday’s package of tax hikes and spending cuts won’t be the last British budget to come under the scrutiny of the international bond debt markets.

Readers on this side of the Irish Sea, who recall the financial turmoil of 15 years ago, know there will be no escaping the verdict of international lenders for many years to come.

The predicament facing Rachel Reeves is not of her making. For decades, Britain has failed to generate sufficient amounts of tax revenues to fund its public services and has borrowed large amounts from the bond markets to help pay the bills. It is not the only major economy to have significant levels of debt, but bond investors believe that Britain has its own unique problems too.

The British economy was harmed by the Brexit vote in 2016. The Covid crisis appears to have weighed more heavily than elsewhere. And political instability certainly hasn’t helped.

Three Co Tyrone firms named among recipients of new €20m Shared Island grant scheme

Tesco progress £10m bid to relocate Dunmurry supermarket to Makro site

Liz Truss and Kwasi Kwarteng inadvertently almost blew up British bond markets in September 2022 with their mini-budget that never was. Inflation in Britain has remained stubbornly high. And it is not surprising that bond markets are insisting the British government pays a hefty interest rate, or yield, for their gilts, the name the British give to their sovereign bond IOUs.

A few years after getting Brexit done, the British government has been forced to surrender real sovereignty to their lenders on the sovereign debt markets.

British policy makers still appear slow to learn lessons from the debt crisis that faced the eurozone more than 15 years ago.

Veteran reporters covering the Irish debt crisis and the huge mistakes taken by government ministers and their advisers in Dublin in 2008 will recognise the worrying signs.

In a pre-budget story this week, the New Statesman reports the bafflement of a No 10 special adviser about the financial workings of the markets. London is a financial centre but the knowledge of its workings in Westminster and among the wider political and media commentators is not all that it should be at this time of financial crisis.

“At a meeting of No 10 in September of this year, one source heard a special adviser ask: “What are gilt yields?” the New Statesman reports in its cover story.

“A government whose opponents were destroyed by the bond markets, and which is paying those markets £300m a day in debt interest, apparently employs people who have not taken five minutes to understand how they work,” the publication says.

The National Institute of Economic and Social Research in London last week brought together three experts to discuss the sobering question of ‘how sustainable is Britain’s debt?’

The NIESR had already made clear its views on the famous fiscal rule – the self-imposed budget discipline that Reeves says she will need to apply through 2029 if the British state is to avoid even worse financial trouble.

“But the central issue is not the fiscal rule itself – it is debt sustainability,” the institute says in its pre-budget assessment. “With interest rates now higher than the economy’s growth rate, simply stabilising debt at 100% of GDP will require primary surpluses,” it warns.

Irish readers will be only too aware of similar assessments here at the onset of the eurozone crisis in 2008, when euphemisms of “budget adjustments” were used to disguise the reality of painful spending cuts.

The NIESR panel brought out historic charts to show the debt dynamics of the British state way back to 1694, when the Bank of England was set up to help the London government fund the enormous debt it had accumulated from fighting wars in France, Ireland, and Scotland.

Oddly, the NIESR panel gave little time to discussing the lessons of the eurozone debt crisis of 15 years ago and the experience of Ireland, its neighbour. (A discussion on how the British state can afford to ramp up defence spending from borrowed money and fund public services could be a discussion for another day).

The potential for the need to draw on the IMF was mentioned, but the consensus of the panel was that Britain didn’t face an imminent threat of being cut off from bond markets. Subsequent tough annual budgets would nonetheless be necessary to bring British finances under control.

On this side of the Irish Sea, economists and veterans of the Irish debt crisis will also be assessing Wednesday’s British budget.

Senior economist Jim Power says the significance of the elevated levels of debt interest rates is that Britain has less money available to invest in its public services.

Despite their higher debt burdens, France and Italy have significantly lower borrowing costs because they can lean into eurozone-wide supports instituted since the financial crisis.

“Brexit has seriously increased the exposure of the UK in two ways because any potential safety net does not exist and exiting the EU has stymied British export growth,” Power tells the Irish News.

Despite Labour’s huge majority, political instability has continued, which “has not helped matters”, he adds.

Séamus Coffey, the chair of the Irish Fiscal Advisory Council, which was set up following the Irish crisis, tells the Irish News that meeting or not meeting a fiscal rule may have little outcome “as bond markets are looking at the size of the debt and growth prospects”.

And Conall Mac Coille, chief economist at Bank of Ireland, tells the Irish News that the debate ahead of the budget about the size of Britain’s fiscal hole likely did little to reassure bond investors who “are probably rightly sceptical about any austerity measures that are planned far into the future”.

Wednesday’s budget looks likely only to increase the intrigue about the state of British finances.

eamon.quinnbiz@gmail.com