Andy Burnham says it's time for the UK to stop being in hock to the bond markets. The City is in uproar, but who really calls the shots in Britain—the government we elect, or unelected financiers? In this video, I unpack Burnham's challenge, the myths about debt and borrowing, and why democracy—not markets—must decide our future.

This is the audio version:

This is the transcript:

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Andy Burnham has told the media that it's time that the UK got beyond being in hock to the bond market.  And he's right, of course, that is obviously true, but let's just put all of this in context.

Andy Burnham was a Labour cabinet minister in Gordon Brown's government in 2009 and onwards, and he was well innovative at the time, but nobody who stood out from the crowd.

A few years ago, he decided to leave Parliament. He became the mayor of Manchester. He's been elected for his third term now, and people think he's been pretty successful in an area which remains hardcore Labour throughout. But, and precisely because he has been successful in Manchester, some Labour members on the supposed left of the party are now viewing him as a successor to Keir Starmer, and what he says is therefore being picked up in the media.

I want to contextualise this. I watched Burnham stand against Jeremy Corbyn in 2015, and his arguments on economics were, to be polite, pretty weak. I think he's come a long way since then because what he's now said shows a much deeper understanding of both the needs of society and the needs of the economy.

But let's go back to that point. Do we need to stop being in hock to the bond markets, because the fact is,  the City is panicking about his comments. They're  saying that they must increase the price of government borrowing now in case Andy Burnham does, somehow or other, and I very much stress that somehow or other, when he's not even a Labour MP, become leader of the Labour Party and Prime Minister in replacement to Keir Starmer. And others are accusing Andy Burnham of having a cavalier attitude towards the needs of the City of London.

So, let's just unpack all of this.

First of all, the chances of Andy Burnham becoming leader of the Labour Party anytime soon are exceptionally remote. So all of this is a little bit hypothetical. But from the sidelines, Andy Burnham can still influence debate, and in that sense, this is important. What he's saying is  that bond markets should not be running the UK economy, and this government clearly thinks that the bond markets do run the UK economy.

Rachel Reeves says she must keep them happy.

Keir Starmer says he has to keep them happy, or we will have a Liz Truss moment, something I will come back to in a few minutes.

Markets nod sagely in agreement, as do all the market commentators who believe that the markets rule, and of course,  Rachel Reeves has put in place fiscal rules that confirm all of this.

Any suggestion of a challenge to this status quo convention leads to market tantrums, and that's exactly what Andy Burnham is creating. And what markets want to think is that they hold a veto over democracy, and he's having the temerity to stand up and say maybe they don't.

Let's have a look at what Andy Burnham actually suggested.

He suggested  a big council house building programme. As somebody responsible for local government, it's hardly surprising that he knows that this is necessary.

As somebody responsible for what goes on in Manchester, again, it's hardly surprising that he sees the need for this. We have an absolutely critical  shortage of social housing in the UK, and council housing, most of all, and therefore what he's proposing is not only necessary, but it's fundamental to ensuring that we head off the threat from the fascist right-wing.

Andy Burnham is also talking about the nationalisation of utilities, starting, obviously, with water, where we have a clear failure of everything that has happened since privatisation, and he knows that the cost of this is relatively low because, first of all,  the bonds are just simply issued; nobody has to raise any money to actually pay the price of buying these utilities. And secondly, the price that will be paid will take into consideration the trading of these companies and in many of the utilities that he wants to nationalise, frankly, things are looking pretty commercially poor, and therefore, the price to be offered is low.

And he wants to achieve these two core goals which exactly match with the wishes of Reform voters, let me stress, by taxing the well-off more, which is, of course, easily doable as I show in  my Taxing Wealth Report, and he suggests that we might need  to raise maybe £40 billion of additional borrowing, or roughly in proportion to the £2,800 billion of government debt currently in issue, about 1.4% of the total.

In other words, what he's saying is nothing very difficult to imagine, and it's entirely possible to believe it would be completely politically popular.

It's also, of course, orthodox social democracy. This is what Labour is all about. What he's saying is true to the core Labour policy.

They did create most of the UK's social housing. Some, of course, happened before World War II, and it was not Labour's responsibility. Liberals had a big role in that in some parts of the country as well. But investment in housing and infrastructure is Labour core policy, and it creates assets for the nation, critical assets for the nation. It improves our wealth.

These things are not a burden. These things are not a liability. The cost - the interest paid - and that's it - is tiny in comparison to the benefits provided.

And what is more,  nationalisation can reduce long-term costs, for example, with regard to the benefits paid on housing alone. We could, in fact, pay the costs of new social housing by ensuring that housing benefit was effectively no cost to the government, because people would be living in government-owned houses.

But nonetheless, the City is claiming that this risk is spooking markets. They claim that interest rates will have to rise.  They claim that at present, the 4.7% interest rate payable on 10-year government bonds will be too low.

But let's just for a moment, think about that rate of 4.7%.  4% of it is basically determined by the fact that the Bank of England says its bank base rate is 4%, and therefore, why would the gilt rate be less than that? What is more, as we know, the Bank of England is selling £70 billion worth of bonds into financial markets in the next year - a figure way in excess, by the way, of the number that Andy Burnham wants to sell into financial markets for social purposes - and the only reason the Bank of England wants to do that is  to simply take liquidity out of financial markets to force the interest rate on government borrowing higher, which is precisely what its policy is. So the figure of 4.7%, which it costs at present to borrow if you are the UK government, is exactly what the Bank of England has set, and has nothing to do with what markets have decided.

Andy Burnham isn't spooking markets. He's making the most marginal change to something which, frankly, is being set by the Bank of England, and which could be cut by them as well.

But just to understand this, let's understand who's being spooked, because let's have a quick look at who owns the UK national debt.

And this chart shows the figures, but I'll run through them just in case.

Insurance and pension companies own 22.3% of UK national debt, just under a quarter, in other words.

Just under another quarter is owned by the Bank of England. In other words, that debt doesn't even exist. Let's be clear about it. If the government owns its own debt, this isn't an issue we have to worry about.

So when market commentators - I heard Helia Ebrahimi say this on Channel Four the other night - say that the UK's debt outstanding is £2.8 trillion or £2,800 billion, she was talking total nonsense. The actual figure is only just over £2 trillion because the figure owned by the Bank of England isn't really debt at all, and yet they don't want to acknowledge that.

33.4% - or almost exactly one third of UK national debt - is owned by overseas investors. Now, let's be clear who they are. A large part of that sum is owned by foreign governments who hold UK sterling balances in the ownership of gilts because they want to own sterling because it is still a world reserve currency, and trade with the UK does, in their opinion, require that they hold sterling, and to balance their overall portfolios of foreign currency holdings, especially at a time when the  dollar is looking decidedly dubious as to value, they need to hold sterling.

So most of that balance is foreign central banks , just by the way, as we own balances in other currencies as well, because that's part of our overseas holdings. So there's nothing unusual about this overseas holding. Some of the rest, by the way, is people who run trade surpluses basically with the UK: they sell more into the UK than we buy from them, and this is the balance left over, and they leave that in deposits as well. But there's nothing frightening about that figure, despite everything that people say.

Our banks only own 7.4% of UK government debt, a surprisingly low figure, but you do to some extent have to combine that with that figure for other financial institutions and large companies who own 13.5%, because between the two, depending on the time of the day, around 20% is owned for the purposes of what is called the repo market,  which is the overnight London deposit market with regard to borrowing, which does not depend upon the deposit of cash, but depends upon large companies buying bonds from banks, which they hold overnight and sell back to them the following morning. I know it sounds daft- it sounds crazy- and it is - but that's because they don't trust the banks to go bust overnight. So they want to own these assets for the sake of that market.

So  20% of all government bonds are basically owned for the purposes of making sure that our large financial institutions in the UK can actually deposit money overnight when they aren't using it.

And at the bottom of that list, there's  just 0.1% of all UK government bonds are owned by individuals, which is quite extraordinary.

So who wants to panic if we look at those market sectors?

Insurance and pension companies don't, because they want to hold bonds for the long term.

The Bank of England doesn't because it is the government.

Overseas investors aren't worried by this. They're getting a better rate of interest in the UK than they are elsewhere. They're not going to be going anywhere if a minor change in the level of borrowing takes place.

And the other players basically need this money for purely practical purposes. So all of this talk about markets panicking is complete and utter nonsense.

But two things I stress. This talk about the fact that  markets are, in some way, the people who are driving the process is not true. Markets aren't driving this process.

The markets, the people behind, the financial institutions in the City of London, the people who entrust money to their care, are not panicking.

What we are hearing is political talk by some people who are claiming that taxpayers are going to be taken for a ride by people like Andy Burnham. But all of that is false.  The people who are talking are those who want to protect the elite privileges of those who trade in bonds in the City of London and who see great advantage by creating market turmoil because they tend to make a lot of money out of it, and, who believe, they act in the interests of the wealthier part of the British public, because, of course, they do dominate the ownership of pensions and life assurance funds behind the scenes.

But, these bond traders who are sending out these messages about how terrible Andy Burnham is are not elected. They're trying to claim a veto over power. They might oppose social housing and the nationalisation of utilities, and the expansion of public investment. They might be fearful about the fact that Andy Burnham might want to reduce their speculative profit opportunities, but  they're only concerned about themselves. They're not concerned about society.

And the reason why they're spooked is that there's a politician on the horizon who's calling them out.

Now, let's be clear, markets can move in unexpected ways. We did see that with  Liz Truss in 2022, but that was a complex story, much more complex than I've got time to explain now.  And most of the reaction to what Liz Truss did was because of the simultaneous action of the Bank of England to announce that it was going to massively expand its bond sales, and that's what caused the crash, Liz Truss didn't. I'm not letting her off on the grounds of competence or anything else; she was clearly absurd, hopelessly out of her depth; her budget with Kwasi Kwarteng was utterly incoherent, and markets did react adversely. But all I'm saying is they reacted adversely to the Bank of England just as much as they reacted adversely to her.

But if somebody explains what they're doing, and that was the fundamental problem of what happened in September 2022, when Truss was around, because she didn't explain what she was doing - if somebody does explain they're using borrowing to fund assets and that this is not a tax giveaway, then there is very little prospect of a real bad market reaction, because of course,  financial markets are totally used to people borrowing to fund asset investment. That's what they're meant to be doing all the time, day in, day out. So if truth be told, the City is talking nonsense now, and if this actually happened, there would be no market reaction.

In other words, Andy Burnham is right. The UK must move beyond being in hock to financial markets, and it can move beyond being in hock to financial markets.

The fact is that, as modern monetary theory shows,  we don't even need to borrow as an issuer of our own sovereign currency. We issue bonds because the City of London, and pension funds, and life assurance funds, and overseas governments, and overseas individuals, or more likely institutions who want to save in the UK, need these to facilitate their own financial portfolios, but not because the government does, because it can never run out of money, and it can always borrow from the Bank of England.

And the fact is that this is shown by that 0.1% of bonds that are in individual ownership.  There is no reason for the government to issue bonds. It does so because the City - but no one else - needs them.

So Labour must choose: is it going to be the City's messenger? Or is it going to promote a politics of care, which is what Andy Burnham seems to be talking about to me?

The politics of care demands truth-telling. That requires that we say  the state has the power to invest responsibly. It has got the power to fund its own activities if it wishes. It has got the option of cooperating with the City if the City wishes to place funds with it, which we call borrowing, but which is really deposit-taking. And the truth is,  bond markets are a threat to democracy in the way we treat them now, and they need to be put in their place.

It's time to stop bowing to the City of London.

It's time to declare that democracy must win.

It's time to declare that people are the priority and financiers aren't.

That's what Andy Burnham is doing. What do you think?

We've got a poll below.

Do you think that the City of London should be put back in its box?

Do you think that the government should treat it as someone who deposits funds with it rather than someone it borrows from?

Do you think the priorities of people should come first?

Let us know.

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Poll

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Taking further action

If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.

One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.

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Comments 

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