Were the Boys really Back in Town?

"Guess who just got back today? Them wild eyed boys that had been away. Haven’t changed, had much to say. But man, I still think them cats are crazy” (The Boys are Back in Town by Think Lizzy, 1976)

Things were apparently getting so nervy in the City of London in recent days that it was being suggested in some quarters that a full-blown run on Sterling and UK Gilts was possible if the government didn’t act quickly and alter course on its 2025/26 Budget plans.

When she returned from China – not earlier than originally intended! – Chancellor Rachel Reeves promised the House of Commons that she would respect her new fiscal rules “at all times”. I was in the audience when ECB President Mario Draghi first uttered his subsequently infamous “whatever it takes” line in 2012, which only became infamous through his subsequent actions to arrest the Euro Crisis. Time will tell if Rachel Reeve is made of equally stern stuff, especially if the global sell-off in bond market continues, which would add to existing government spending plans in the form of higher debt-servicing costs.

We’ve been wracking our brains in recent days to try to pinpoint another moment in recent financial history when a government’s attempt to tighten fiscal policy was attacked by financial market vigilantes for being too tough. We can’t think of a single one (comments and suggestions are welcome on this, by the way!). There is a first time for everything, of course. A decade or so on from the great UK austerity of 2010 – never mind the austerity bestowed on Spain, Italy, Ireland and Greece in the mid-2010s – some people have to come to believe that austerity doesn’t work. We’ve even seen a few mentions of the so-called Laffer curve in recent weeks (this idea – first sketched on the back of a napkin by US economist Arthur Laffer in the early 1980s – is that lower taxes can end up raising overall tax revenues because they incentivise more risk-taking on the part of business owners and others). But financial market vigilantes punish governments whose plans are too loose overall, not too tight. If vigilante activity is at work trying to scupper the government’s plans, we need to look beyond the financial market types, in other words.

Vigilantes come in many guises, of course. Most active in the 1980s and 1990s, the infamous FX and Bond Market vigilantes have been generally quiet in the decades since, thanks variously to the introduction of the Euro (fewer currencies to attack), a big build-up in Emerging Market FX Reserves (harder to attack many of those remaining currencies), a historic reversal in trade imbalances (now the richest countries tend to run deficits, not the poorer ones) & forward interest rate guidance (less second-guessing of future Central Bank policy to do), among other things.

But just as many of the Bond and FX market vigilantes went to bed in the mid-2010s, so Greta Thunberg got out it, and with her came a new generation of vigilantes, some of whom – unlike the Bond Market vigilantes – would even lay across the M25, stand on top of tube trains, and stick themselves to government buildings. Equally, with monetary policy ceasing to be active for much of the 2000s and 2010s, but now (thanks to globalisation) with a world full of countries seeking external investment, so companies became more active in trying to pressure governments to help them achieve their goals with fiscal measures instead.

More than likely, the only vigilantes trying to stop the UK government in its tracks now are the opposition parties within parliament, and the direct targets of the government’s tax raising measures beyond it. At least as far as the companies are concerned, we hope there comes a point – soon – where they realise that the expected benefit of continuing to gripe about the Budget is less than the cost that their ongoing complaining is extracting from the economy in 2025 in terms of slower growth, as consumers respond to what they perceive as protracted uncertainty by postponing spending decisions.

For the economy’s sake, it's high time to move on.