Government bond yields show Britain can’t borrow for growth, so let’s give savers a good deal and use it: SIMON LAMBERT

Rachel Reeves has a problem – and it’s now bigger than the problem she inherited as chancellor.

Borrowing costs in Britain have risen since the chancellor’s autumn budget and 30-year government bond yields have hit a 27-year high.

Reeves and Sir Keir Starmer squandered the optimism they had been blessed with by a change in government and bizarrely opted for miserabilism.

They talked about a so-called £22 billion black hole and talked about the economy, then introduced a series of anti-growth tax increases.

Meanwhile, we live in a country where public services are in shambles and after years of underinvestment it can often feel like nothing is working properly.

In short, we cannot fix Britain and provide the improvements and support we need for future growth because we do not have the money and must borrow to finance it.

It is not a good time for international investors to do so, as Britain is far from the only country with this problem, and the problem is exacerbated by Britain’s self-inflicted dent in business and market confidence.

Against that backdrop, it is not surprising that borrowing costs have risen in Britain. (Read our guide to government bond yields and why they’re rising.)

The yield on ten-year government bonds is 4.8 percent, compared to 3.8 percent a year ago. Meanwhile, the 30-year Treasury yield that has made headlines in recent days is 5.36 percent, up from 4.42 percent a year ago.

This isn’t all Reeves and Starmer’s fault. Part of this is due to an adjustment in global interest rate expectations, which may be causing the pendulum to swing too far.

But Labour’s Gloom Twins are responsible for some of it: crushing the economy, plummeting confidence and raising taxes on investors, businesses, jobs and wealth was a foolish tactic.

The rise in borrowing costs is particularly unfortunate given Labour’s brutal Conservative attacks on Liz Truss, which are sending government bond yields soaring.

It is worth noting that this is not the same scenario – government bond yields have been steadily rising rather than skyrocketing – and that Truss and Kwasi Kwarteng’s mini-Budget was by no means a success.

Too much was revealed in one reckless and unfunded blow, the moves came at no OBR cost, Kwarteng overshadowed its own income tax cut for everyone with a tax cut for the highest earners, and they failed to take into account the unrest that would can arise in the bond market due to too smart investments in pension funds.

The list doesn’t end there and our current predicament was also caused by Jeremy Hunt’s nice police action after the mini-Budget, when as Chancellor he not only reversed the tax cuts but also increased taxes and reformed Great Britain’s warped tax system. Britain continued to tilt.

However, the disastrous end to the Truss-Kwarteng gamble does not mean they were entirely wrong.

They identified Britain’s persistently low growth as a problem and wanted us to radically change our thinking so that Britain could get out of its slump and the economy could reach breakout velocity.

Reeves and Starmer broadly agree; Labor’s manifesto and campaign had a similar pro-growth sentiment.

The problem is that it’s all very promising growth, but once the economy is in power, the reality comes closer: we have to speculate in order to accumulate, but we don’t have the capital to do that.

The alternative is to borrow, but we already have a huge mountain of debt and investors want higher interest rates to lend to us, further hampering Britain’s finances.

This is something that Paul Johnson of the IFS has called a ‘fiscal doom loop’.

He says: ‘The problem is that with high debt, higher interest rates and low growth, we run the risk of being stuck on a treadmill, or in a “doom loop.”

However, it is not entirely true to say that we do not have the capital to get Britain back on track.

The government represents Britain and its people and some of those people are sitting on a lot of money.

The FCA estimates that total UK cash savings are around £1.5 trillion. Some of this will be much-needed rain pots and other short-term savings, but the FCA has also found that a large part of this is in low interest accounts and much of it could be invested instead.

British retired investors also collectively have a large amount of money in their pension pots, which is needed to finance their pension.

Money savers and retired pension investors are generally quite cautious. They want good returns, but they also value that they are reliable and come from a low-risk source.

Perhaps the answer to unraveling Britain’s growth problem is to offer it to them.

The government could launch Back Britain Bonds offered to ordinary savers and investors.

Sold in a more easily accessible and understandable way than government bonds, these would be 10, 20 or 30 year bonds that provide a guaranteed return with your money back at the end, or perhaps upon death.

In this way they would distinguish themselves from fixed savings accounts, which usually have a term of a maximum of one to five years.

They would also differ from annuities, where an income is paid for life, but the amount invested disappears at the end.

Interest rates on Back Britain Bonds could therefore be lower and should not torpedo the annuity market, but instead offer additional options for pension savers who crave a stable, guaranteed income.

A plan like this would allow us to bypass fickle international investors and tap into the deep pool of very patient capital that Britain’s money savers and pension investors have.

It would also be a potential solution to one of the problems facing the British economy: how to unlock the considerable wealth of the British and put it to productive use.

Instead of paying institutional and international investors to borrow, we would pay interest to our own savers and investors, who would welcome government bond-type returns and provide a much more stable investment base.

The money could then be set aside in a way that ensures it is not used for day-to-day expenditure, but only for the material improvement of Britain in a way that represents an investment in our future.

This investment would in turn boost the economy and improve our finances, and hopefully deliver a second round of savings and pension investors spending some of the income they received on their Back Britain Bonds.

There is a small risk that the markets might not like this, but for too long we have been afraid to do what is right for Britain’s long-term future because we worry about that.

Tapping into your own country’s savings to improve things doesn’t seem like a bad idea – and in the long run, investors are much more likely to support a country that is emerging from the doldrums.