International confidence in the UK government’s economic policies had evaporated. Growth was stalling, inflation was galloping, and Labour – back in power after a reckless Conservative administration had gambled on tax cuts – was in deep trouble.
It was 1976, when James Callaghan’s government was forced to go cap in hand to the International Monetary Fund for an emergency loan. Fast forward almost half a century and some economists are drawing obvious parallels.
Just as Callaghan’s chancellor, Denis Healey, did before her, Rachel Reeves is facing a challenge to placate jittery global investors. The UK’s long-term borrowing costs have risen close to their highest level since 1998, adding to pressure on the chancellor before a tough autumn budget.
With a lacklustre growth outlook, sticky inflation, and Labour’s welfare U-turns hitting the public finances, most economists expect Reeves to announce a raft of tax increases to cover a shortfall of between £20bn and £40bn against her main, self-imposed, fiscal target.
Last weekend the Sunday Telegraph ran an article headlined: Britain heading towards IMF bailout, featuring quotes from three experienced economists comparing the fiscal mess facing the two Labour administrations 49 years apart.
However, for most economists, comparisons with Healey’s begging-bowl plea to the global lender of last resort are significantly overblown.
“You can quote me as saying that is complete nonsense… something like that is just hysteria,” said Michael Saunders, a former member of the Bank of England’s monetary policy committee. “That is not to say the UK does not have a weak fiscal position. It does. But it is somewhere well between that and an IMF bailout.”
Back in the autumn of 1976, inflation was running close to 17%, having hit a postwar high of almost 25% a year earlier; it forced the Bank to drive interest rates up to 15%. Sterling was in freefall and the UK government faced a buyers’ strike among investors who would normally purchase its bonds, known as gilts.
This week the Treasury sold £5bn of three-year gilts to institutional investors in an auction that was more than three times oversubscribed. The pound has strengthened against other major currencies this year. Inflation is on track to peak at 4%, up from 3.8% currently, economic growth in the first half of 2025 was the fastest in the G7, and Threadneedle Street cut interest rates this month by a quarter-point, to 4%.
Benchmarking things to the 1970s, is, though, a mainstay of British political discourse. The IMF bailout episode became synonymous with national humiliation, and led to Labour’s 1979 defeat and long exile from government.
Jagjit Chadha, a Cambridge university economist and former director of the National Institute of Economic and Social Research (Niesr), who was quoted by the Telegraph, said it could not be predicted whether an IMF loan was required. But he warned the UK’s “unsustainable path” should not be underplayed. “We need to address this risk not devalue it,” he said.
At the Treasury, the most painful episode in postwar economic history remains burned into the institutional memory. Within weeks of Labour’s return to power last year, officials briefed ministers with a 25-minute PowerPoint presentation on the importance of keeping markets onside.
Liz Truss triggering a meltdown in the market for UK government debt with her September 2022 mini-budget had been a potent reminder of the fragile conditions in markets, and underscored Britain’s delicate position.
Baked into the rise in government borrowing costs are several ingredients.
After a succession of shocks – from the 2008 financial crisis, to Brexit and the Covid pandemic – the UK’s national debt has risen to the highest level as a share of GDP since the 1960s. The return of high inflation and the end of rock-bottom interest rates has made servicing those debts more expensive. An ageing population and political pressure to mend battered public services has added to the strain.
The Bank has also complicated matters further. Although it is cutting rates, the central bank is also selling UK government bonds to unwind its crisis-era quantitative easing scheme, adding to the supply of debt investors are being called on to buy.
Earlier this month, Threadneedle Street admitted for the first time that this had contributed to the rise in the UK’s long-term borrowing costs. At its next policy meeting on 18 September, the Bank will decide whether to reduce its sales over the next 12 months. Most economists believe a reduction is likely.
Britain is not alone in facing challenges. Borrowing costs have risen across advanced economies, in part because of Donald Trump’s trade wars and his assault on the independence of the US Federal Reserve. Several other countries are seen as running unsustainable fiscal policies, including France, where Emmanuel Macron’s government is in crisis.
Chris Scicluna, a former Treasury economist who is now head of research at the Japanese bank Daiwa Capital Markets Europe, said the UK was more reliant on overseas investors to buy its debt than some other countries were.
“Debt stocks are much higher than they used to be. Therefore governments need to be offering higher yields to attract buyers, and there’s no shortage – whether from the US, euro area or Japan – and unfortunately the UK has to compete to attract investors.”
Many investors believe that Reeves has made a rod for her own back. Labour promising before the general election not to raise income tax, national insurance or VAT has left big revenue-raisers off limits. Labour’s welfare U-turns show that further spending restraint is not an option.
Neil Mehta, a hedge fund manager at RBC BlueBay Asset Management, said: “The government can’t contain spending or tax effectively without breaking manifesto rules. No one wants to make the tough political choices. If we continue like this the market will act as the enforcer, like it has done many times in the past.”
The trouble for Reeves is that raising taxes to balance the books could undermine economic growth. Her previous measures also stoked inflation. That in turn would be viewed negatively in financial markets, in what some economists refer to as an effective doom loop.
Andrew Sentance, a former MPC member, said that comparisons to the 1970s were valid, but that suggesting an impending IMF bailout was hyperbole.
“I do not think in the UK’s case we are heading for an IMF bailout,” he told the Guardian. “You have a cocktail of problems which is very reminiscent of the 1970s. Does that mean we have to go to the IMF? No, not necessarily. Does it mean there is some kind of reckoning in terms of an economic crisis coming up, of some sort? Yes, that’s quite likely.”
