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British politicians should be wary of provoking a backlash in financial markets by increasing borrowing too quickly, the outgoing head of the UK’s Debt Management Office has said, ahead of a general election expected this year.
Sir Robert Stheeman, who has overseen an eight-fold rise in the UK’s debt pile over his 21 years as the government’s borrowing chief, warned that the job of issuing bonds was getting harder and investors might increasingly act as a restraining influence on fiscal policy.
“Don’t kid yourself in thinking that you can develop policy in a vacuum without taking the market into account,” Stheeman told the Financial Times, reflecting on ex-prime minister Liz Truss’s ill-fated “mini” Budget of September 2022 which sent the gilt market into meltdown. “In a world where we have debt to sell, policymaking cannot be divorced from the reality of the market.”
His comments come as political parties gear up for an election campaign in which public borrowing plans are likely to feature heavily. Sir Keir Starmer’s Labour party, which is far ahead in the polls, watered down a commitment to spend £28bn a year on green investments, amid worries about criticism of its impact on the UK’s strained public finances.
The plan still involves an extra £20bn in annual net borrowing by the end of a first five-year parliament, and City fund managers have warned this could make markets “jittery” and push up gilt yields.
Stheeman said investors’ increasing sensitivity to the scale of government borrowing had been highlighted by the crisis in gilt markets that followed Truss’s plans for £45bn of unfunded tax cuts. Her chancellor, Kwasi Kwarteng, initially tried to shrug off the violent reaction from investors saying “markets will react as they will”, and has since claimed he was a “victim” of irrational bond markets.
But according to Stheeman, who oversaw a £4.5bn gilt sale on the day the turmoil peaked and the Bank of England stepped in to stabilise markets, the episode showed the futility of telling investors they have got it wrong.
“Markets are very human things, don’t rail against the market because all you are doing is railing against other people’s opinions,” he said. “The market brings a harsh spotlight at times . . . it was asserting a very, very clear view about what it thought.”
As head of the DMO since 2003, Stheeman has been the government’s main link with financial markets, raising billions of pounds every month from banks, asset managers and pension funds.
The 64-year-old plays down the “cliché” of investors as shadowy bond vigilantes calling the shots over government policy.
Most of the time, the pricing in a market such as gilts — where the government has control over its own currency — simply reflects the investor expectations for the future path of interest rates.
However, that assumption breaks down when the “credibility” of fiscal policy is called into question, according to Stheeman. The swelling of sovereign borrowing in the UK and elsewhere has led to a “greater focus” on that credibility, he said.
Since Stheeman joined the DMO, the UK’s debt pile has grown from about £350bn to £2.7tn. The agency plans to sell £237bn of gilts this financial year, far above the £26bn during his first year in office.
Despite the historically high borrowing requirements and the BoE’s plans to step up sales of the gilts it bought under its quantitative easing programme to £100bn this year, Stheeman said he is not worried about a lack of demand for buying them.
“The fact yields have not risen in an uncontrollable fashion over the past couple of years tells you it’s not just me that isn’t worried — the market isn’t particularly worried either,” he said. “I am confident enough in the resilience and good function of the gilt market not to have a worry.”
In the aftermath of 2022’s gilt market turmoil Stheeman said it was “very notable how quickly international investor confidence has been restored”.
UK borrowing costs surged last year with 10-year gilt yields peaking at 4.75 per cent in August as investors bet the UK would have to keep interest rates higher for longer to tackle a stubborn inflation problem. But since then, bond yields have fallen sharply, with 10-year gilt yields now at 3.6 per cent.
The government has said it will appoint Stheeman’s replacement early this year before his retirement at the end of June. He has run the DMO for the majority of the period since it was spun out of the BoE — where his wife Elisabeth is a member of the financial policy committee — in 1998. His salary was £160,000 last year, according to the agency’s latest annual report.
The DMO has no say in how many gilts are sold, but is responsible for carrying out the government’s plans at the lowest possible cost of borrowing.
In 2020 parliament’s Treasury select committee questioned if its syndications, large sales where a group of big banks is paid to drum up demand from investors, were poor value for money for taxpayers — an implication Stheeman strenuously denied.
“It is essential for this role and also for my successor to maintain a close proximity to the market but also a healthy distance,” he said. “We must never be captured by the market ever — we are here to serve the taxpayer.”
Additional reporting by Jim Pickard and Sam Fleming in London