Rachel Reeves received a rare piece of good news from the financial markets last week on the prospects for the British economy.
The British chancellor and UK Treasury officials had faced twitchy times at the start of the year as international bond investors kept probing the health of the UK public finances, and Britain’s long-term borrowing costs had swelled to elevated levels.
But the market jitters had settled somewhat and Reeves got something of a break.
The UK government last week attracted healthy demand from buyers when it raised £8.5 billion from issuing new sovereign bond debt, although the yield or interest payment still looked eye-wateringly expensive for the British state.
The following day, attending the World Economic Forum at Davos in the Swiss Alps, Reeves was able to pursue her public relations line that Britain was open for business.
The summit brings together global business leaders with government officials.
She was questioned about potential official approval for expansion at Heathrow Airport – an investment project that international investors and business travellers at Davos could immediately relate to – even though any third runway won’t likely be ready for many years.
On this side of the Irish Sea, the messaging from Reeves recalled that of then Taoiseach Enda Kenny at a number of Davos annual summits from 2012.
Kenny repeatedly extolled the recovery of the Irish economy following the devastating banking and property market crash.
Similar to Reeves last week, Kenny’s message at the time was designed in part to reassure international buyers of sovereign bonds that economic growth would in time heal the shattered Irish public finances.
The British refer to their sovereign bond debt paper as gilts, short for gilt-edged securities.
But whatever the term used for what are essentially IOUs that have to be repaid, any government trying to finance outsized annual budget deficits while their economy is underperforming will be at the mercy of the sovereign bond markets.
As Reeves knows, the assessments of sovereign debt markets matter a great deal.
Ireland learned the shocking lesson in 2010 when the public finances couldn’t fill the enormous capital holes created by the broken Irish banks.
For the British, the short-lived premiership of Liz Truss was a reminder of what can go wrong with bond markets when the economic concerns of investors who fund sovereign governments are ignored.
Even before Brexit, the UK economy had been underperforming and the room for manoeuvre for any new government to run large budget deficits narrowed further as UK economic activity failed to ignite after the Covid crisis.
But Brexit raised barriers and costs for trade and darkened the prospects for economic expansion from which tax revenues for public services flow.
For whatever reason, the fallout of Brexit on the British public finances is studiously avoided by British media commentators.
The caution of the new Labour government since coming to power six months ago is explained in part by concerns over the still-elevated long-term borrowing costs for the British state.
Reeves has hailed forecasts from the International Monetary Fund that the British economy will expand 1.6% this year and by around the same level in 2026 as evidence that she will not need to cut spending or raise taxes at her next major fiscal statement on March 26.
Reeves is betting that economic growth will in time heal the British finances and the last thing the new Labour administration will want is any new turbulence on sovereign bond markets.
Conall Mac Coille, group chief economist at Bank of Ireland, says that sticky levels of UK inflation could hold back significant rate cuts from the Bank of England, while bond market investors will continue to scrutinise the new UK government’s deferred plans to cut the British state’s overall debt levels.
“When you step back from it all, the Labour Party is arguably trying to spend its way out of Brexit, and Brexit is what is holding the economy back under the bonnet – exports are poor, investments are poor,” Mac Coille tells the Irish News.
Tom McDonnell, co-director at the Nevin Economic Research Institute, or Neri, which has offices in Dublin and Belfast, says the market jitters will likely be short lived.
“For the first time in a while, we are not having almost vandalistic policies such as Brexit, such as a Truss budget, and other crazy stuff,” he tells the Irish News.
“Given time, they have the capacity to turn round the British economy, but it will take a few years before people see the improvements,” McDonnell warns.
Eamon Quinn is at eamon.quinnbiz@gmail.com