Following France, disaster-level warning bells are ringing for the British economy as well. Yields on British government bonds "gilts" surged to a 27-year high early this month, prompting talk of a potential national default.
Analysts say the "British disease," which saw Britain labeled the sick man of Europe in the 1970s for low productivity and excessive welfare, has returned in a 21st-century form. Welfare expenditure accumulated over decades and structurally low growth are driving the British economy to the edge.
The warning signals coming from Britain's financial markets are clear. On the 2nd, the yield on Britain's 30-year Government Bonds hit 5.72% a year. That is the highest since 1998. The closing level on the 18th (local time) was also 5.43%, still elevated. On the same day, the U.S. 30-year Government Bonds yield was 4.65%, and Italy's was 4.41%. Japan's 30-year Government Bonds yield is 3.21%. Government Bonds yields are a mirror of national creditworthiness. Rising yields mean falling Government Bonds prices. It means the government must pay higher interest to borrow money. It is proof that market confidence in Britain's public finances is collapsing.
In the 1970s, Britain was called the sick man of Europe due to a low capital investment rate and labor productivity. Economists dubbed it the British disease, referring to a state where low investment and low productivity, frequent strikes, a wage-price vicious cycle (stagflation), and chronic fiscal and current account instability piled up. Ultimately, Britain received an International Monetary Fund (IMF) bailout in 1976.
Experts said Britain now looks like a carbon copy of then. From the 2008 financial crisis until 2019 before the pandemic, Britain's labor productivity growth averaged just 0.4% a year over 12 years. Private investment is the lowest among the Group of Seven (G7). On top of that, Brexit, which took effect in 2021, reduced long-term productivity by 4 percentage points. In a recent report, the Centre for Policy Studies (CPS), a British think tank, projected, "At the current growth trend, it will take 41 years for the British economy to double in size, or 58 years in a pessimistic scenario." Compared with the 26 years it took from 1987 to 2007, the analysis is that the growth engine has almost stalled. The report defined Britain today as "a low-growth, low-productivity, low-wage economy with high expenditure, high taxes, and high debt."
British government outlays have swelled to a level difficult to sustain under the current budget. Welfare expenditure such as pensions and medical costs due to aging has increased. Government spending, which was 687 billion pounds (about 1.3 trillion won) in 2010, nearly doubled to 1.335 trillion pounds (about 2.5 trillion won) in 2024. The increased expenditure has piled up directly as debt. The Office for Budget Responsibility (OBR) warned that if current policies are maintained, the government debt ratio, now near 100% of gross domestic product (GDP), could exceed 270% within 50 years.
Jessica Riddle, a senior fellow at the Manhattan Institute in the United States, said in an op-ed in The Washington Post, "The British economy cannot afford the welfare expense demanded by an aging society, and the result is ultimately a surge in liabilities and high interest rates."
The British government is currently spending more than 100 billion pounds (about 170 trillion won) every year on interest alone. That is a massive amount that far exceeds the defense budget. The Financial Times (FT) analyzed, "Britain's long-term borrowing costs are the highest among the Group of Seven (G7)," adding, "because Britain's inflation rate (3.8%) is the highest in the G7."
To make matters worse, the deep-pocketed buyers of British Government Bonds have disappeared from the market. Pension funds and the Bank of England (BOE), Britain's Central Bank and once major buyers of British Government Bonds, no longer purchase their own Government Bonds. The Bank of England is instead reducing its holdings of 30-year gilts by 100 billion pounds a year through quantitative tightening (QT). Supply of Government Bonds is abundant, but demand has dried up, stoking yield increases.
Experts warned in unison that a repeat of the 1976 International Monetary Fund (IMF) bailout could occur. Gerard Lyons, a CPS research fellow, said, "A fiscal crisis is a real risk, and there is no guarantee that a repeat of 1976 will not happen," adding, "If the government loses investors' trust, a crisis can strike at any time."
Britain's Chancellor of the Exchequer Rachel Reeves faces the task of plugging a multibillion-pound hole in the public finances in a new budget to be unveiled on Nov. 26. But both tax hikes and fiscal tightening carry enormous political costs. Experts are watching to see whether Britain's economy, afflicted by a new "British disease," can lay the groundwork for improvement through a large-scale budget revision, or sink deeper into the mire.
Richard Baker, founder of Perivent Asset Management, said, "Britain is choosing the easy path of trying to solve the liability problem with taxes instead of making the difficult decision to reform an overly generous welfare system," adding, "This approach can only inflict serious damage on economic growth."