LONDON, Sept 5 (Reuters Breakingviews) – While global government borrowing costs are rising, the United Kingdom stands out: yields on its long-term government debt recently reached a 27-year high. This reflects deep-rooted domestic economic issues rather than external financial stress. The UK ranks sixth among 36 advanced economies in public debt, fifth in budget deficit, and third in borrowing costs, according to the independent Office for Budget Responsibility (OBR). Additionally, the country runs a current account deficit and carries foreign liabilities close to four times its GDP, factors that have revived concerns about its financial stability.
Some analysts have drawn parallels to the UK’s 1976 IMF bailout, especially following Prime Minister Keir Starmer’s appointment of Minouche Shafik, a former IMF official, as chief economic adviser. However, the likelihood of another international rescue is low. The IMF typically steps in when nations face sudden capital outflows or severe current account imbalances—conditions not currently present in the UK. Its current account deficit has decreased from nearly 6% of GDP in 2016 to 2.7% last year, a level the IMF does not consider alarming.
Moreover, the UK’s net foreign liabilities stood at just 10% of GDP at the end of 2024, down from a peak of 19% in 2021. Gross external exposures, though historically high due to London’s role as a financial hub, have declined by over 20% in the past five years. The structure of the UK’s international investment position has also improved. In 2006, the Bank of England compared the nation’s financial stance to a large hedge fund leveraging debt to fund higher-yielding investments. By 2009, this exposure peaked at over 80% of GDP but has since halved to 40%.
Despite these improvements in external accounts, fiscal weaknesses have intensified. Government debt now stands at 95% of GDP—the highest since the early 1960s—having risen by 60 percentage points over two decades. The UK’s budget deficit of 5.7% last year was 4 percentage points above the average for advanced economies and ranked third highest among 28 European nations. This persistent fiscal gap suggests excessive public demand relative to private sector activity.
The data indicates that last year’s 2.7% current account deficit coincided with a 3.0% external surplus in the private sector, implying that households and firms saved more than they spent abroad. This undermines claims of an overvalued currency or excessive domestic consumption. Instead, the core issue lies in unsustainable fiscal policy. Addressing it would require spending restraint and structural reforms to boost private investment.
The Labour government, in power for just over a year, has struggled to implement such measures. It abandoned a major welfare reform due to internal opposition and plans to expand workers’ rights despite warnings from regulators about economic costs. What’s lacking is not foreign financial aid but coherent domestic policy and political consensus.
Investors may find it ironic that the UK’s balance of payments is no longer a crisis trigger. Were it so, an IMF intervention might force necessary reforms. Instead, bond markets must wait for homegrown political will to correct the fiscal trajectory.
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Britain’s economic woes are sadly home-grown
LONDON, Sept 5 (Reuters Breakingviews) – Government borrowing costs around the world are spiralling, but the United Kingdom is in a league of its own: yields on long-dated government bonds hit a 27-year high this week. That shouldn’t come as a surprise. Unfortunately for investors, Britain’s economic problems are home-grown and a solution looks a long way off.
In July, the independent Office for Budget Responsibility (OBR) reported, opens new tab that among 36 advanced economies Britain has the sixth-highest public debt, the fifth-highest budget deficit, and third-highest government borrowing costs. Moreover, the UK runs a current account deficit, is burdened with foreign liabilities equal to nearly four times its GDP and is host to one of the world’s major international financial centres. No wonder investors fretfully recall Bank of England Governor Mark Carney’s infamous 2017 warning, opens new tab that the country depends on the “kindness of strangers” to finance itself.
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Some economists are even summoning, opens new tab the ghost of the UK’s ultimate economic nightmare: its humiliating 1976 bailout by the International Monetary Fund (IMF). Prime Minister Keir Starmer’s recent appointment of Minouche Shafik as his chief economic adviser seems an ominous coincidence. As a former second in command at the sovereign lender-of-last-resort, she knows how to apply for a loan.
Yet talk of an IMF rescue is misguided. For one, the size of the UK economy and sovereign balance sheet means an IMF rescue could never work. More importantly, it isn’t needed. That’s because the economic imbalances currently plaguing the UK are domestic, not external, and driven by the government, not the private sector.
The clue to the IMF’s role is in the acronym’s first letter. The Washington-based institution exists to provide emergency foreign currency liquidity to countries suffering sudden reversals of international capital flows. That’s something domestic central banks, which cannot print foreign exchange, cannot do. But it also means that the IMF is only the answer when either current account deficits or capital outflows get out of control. In the UK’s case, however, such external imbalances are no longer the issue.
Over the past decade, the UK’s external imbalances have shrunk and are far from the danger zone. The current account deficit, for example, has narrowed from a historic peak of nearly 6% of GDP in 2016 to a mere 2.7% last year. Even the IMF itself, opens new tab says that’s not a cause for concern.
On the balance sheet front meanwhile, the UK’s net foreign liabilities were a mere 10% of GDP at the end of 2024, nearly half the recent peak of 19% in 2021. And while it’s true that the UK’s gross external exposure remains large compared to other countries – largely because of the City of London – this too has been contracting. Gross foreign assets and liabilities have fallen by more than a fifth over the past five years.
Finally, the structure of the UK’s international financial position has become more robust. In 2006, the Bank of England likened, opens new tab the UK’s combination of large-scale net foreign equity holdings financed by an equally epic level of net foreign debt to the operations of a gigantic hedge fund “that earns net income by borrowing to invest in projects that earn a higher return than the cost of funding”. That risky business reached its peak in 2009, when the combined absolute exposures reached a peak of more than 80% of GDP. Once again, the imbalance has halved, declining to 40% last year.
As the UK’s external imbalances have receded, however, its fiscal vulnerabilities have exploded. According to, opens new tab the OBR, UK government debt currently stands at 95% of GDP – its highest level since the early 1960s. That metric has risen by nearly 25 percentage points over the past 15 years, and 60 percentage points in two decades. Most advanced economies have suffered deteriorating government finances, but the UK has consistently been amongst the worst. Its budget deficit has been in the top quartile for advanced economies every year for the past decade. Last year’s gap of 5.7% was 4 percentage points higher than the advanced economy average, and the third highest among 28 advanced European nations. If the UK Treasury’s priority is to be below the relevant median on debt and deficit metrics when a global crisis comes around, civil servants in the finance ministry must be sweating.
What this all shows is that the UK’s imbalances are domestic – and that the solutions lie at home. A current account deficit of 2.7% of GDP in the face of a fiscal deficit of 5.7% implies that the UK’s private sector ran an external surplus of 3.0% of GDP last year. That’s hardly evidence of an overvalued real exchange rate or that UK households and companies are spending beyond their means. Rather it shows an out-of-control fiscal deficit stemming from a chronic excess of public over private sector demand. The logical remedies are fiscal retrenchment and comprehensive supply-side reform to incentivise private sector-led growth and investment.
Those are aspirations that the UK’s year-old Labour government has struggled to realise. In June, it withdrew its flagship attempt to rein in welfare spending following opposition from the party’s own lawmakers. Later this year, meanwhile, it will enact a pledged reform of workers’ rights, opens new tab, despite Britain’s independent regulatory watchdog raising a red flag over the costs, opens new tab. What’s missing is not a foreign currency bailout, but domestic political support and a coherent economic plan.
Investors could almost be forgiven for regretting that Britain’s balance of payments is no longer a problem. If it were, a visit from the IMF might be a more realistic prospect. Instead, bond investors seeking a catalyst for politically painful changes should recognise they are on their own.
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Editing by Peter Thal Larsen; Production by Streisand Neto
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Felix Martin is an economist, fund manager, and author. During a twenty-five year career in international finance Felix has managed and advised on funds investing in bond, currency, and credit markets globally at publicly listed asset managers, leading private firms, and his own independent boutique. He began his career at the World Bank in Washington, DC. He is also the author of “Money: The Unauthorised Biography”.