Why other countries are not facing the same turbulence as Britain

An intolerance of inflation and the end of cheap money mean the UK is being hit hardest

C oncerns over spiralling government borrowing have caused market turmoil in the UK, with the pound falling and gilt yields surging. But debt levels in Britain are lower than in many comparable economies. Markets are punishing the UK despite a better track record of managing our costs.

The UK’S debt-to-gdp ratio was 99.6pc in the first three months of the year, according to the latest available data. This was before the full effects of the war in Ukraine were clear and well before the mini-budget. While this was over 10 points above the EU average, the UK was behind neighbouring countries like Spain (118pc), France (114pc) and Belgium (108pc). Across the Atlantic, the US’S ratio stood at 121pc during the same period.

So why is Britain being singled out?

Permanent tax cuts

The tax cuts will amount to around £43bn in extra borrowing five years from now – meaning this is a permanent structural change to public finances that will potentially result in long-term higher borrowing, whereas other countries are only temporarily lifting spending to tackle the crisis.

Many countries are taking steps to protect consumers and businesses from energy prices, but the UK’S scheme is among the most generous.

Liz Truss has also ruled out levying a further windfall tax on energy companies – a move economists say could help to keep debt levels down.

Less tolerance for inflation

Another difference between the EU and the UK is that the ECB is usually seen as having a higher tolerance for inflation. This means markets tend to expect interest rates in the eurozone to rise more gradually, putting less pressure on government borrowing costs. However, executive board member Isabel Schnabel has recently said the central bank needs to break these perceptions.

On the other side of the Atlantic, the US economy has grown much faster than the UK after the pandemic.

End of cheap money

The Bank of England’s aggressive approach to reversing quantitative easing has frayed investor nerves by threatening a flood of debt on to the market. It built up a balance sheet of £895bn of government and corporate bonds under QE since the financial crisis. Officials had planned to begin the process of unwinding the purchases this year, first by allowing the bought debt to mature and then by actively selling the bonds.

However, the Bank’s £40bn gilt sales planned for the next 12 months would have coincided with huge borrowing by the Chancellor to pay for energy bills support and tax cuts.

The market chaos following the mini-budget forced it to postpone the gilt sales from Oct 3 to Oct 31, the day of Kwasi Kwarteng’s fiscal statement.

However, bond traders warn the Bank could be forced to delay the plan again as the UK becomes the epicentre of bond market turmoil.