Blackford: The markets are in charge now, not the Chancellor

The Herald Scotland

08-07-2025

We can debate how we got here. However, the harsh reality is that the Chancellor has the responsibility to chart a course off the current path.
Given spending commitments and the lack of fiscal headroom, tax rises are coming again. Indeed, we now know that Rachel Reeves has told the Cabinet this.
The pattern of the last few years is recurring, although tax rises cannot be matched by another increase in borrowing.
The financial markets will punish the Chancellor if she tries to increase borrowing, and she knows this.
Put simply, the financial markets will largely determine the fate of the Chancellor and our fiscal future.
The consistent increase in tax and borrowing over the last 17 years is not sustainable. The party is over.
We had the spending. Get set for the financial hangover.
The Government's own forecasts suggest tax will rise to 37.7% of GDP by 2027–28, the highest tax-to-GDP ratio of all time. Higher and higher is not a compelling mantra.
We ought to be focusing on how to turbocharge economic growth as a source of tax receipts, using growth receipts to invest in public spending and, over the longer term, seeking to pay down debt.
What is missing is a material programme to drive up growth and investment.
Where is the sense of urgency that recognises an acceleration of growth over a sustained period is the only way of improving finances and allowing for the investment in public services we all want to see?
It is the lack of consistent, material economic growth over the last 17 years that led to increased Government spending as a shock absorber for the financial crisis, Covid, and the impact of the cost of living. That is what has resulted in today's high-debt, high-tax outcome.
Heaven help us if we face another external shock, given UK PLC's balance sheet.
I shudder to think how the UK could finance another Covid-style crisis.
When Labour was last in power from 1997 to 2010, reasonable economic growth allowed for public sector investment to grow without increasing Government spending as a percentage of GDP.
Indeed, the ratio fell from 37.4% of GDP to 36.3% of GDP between 1997 and 2007.
The financial crisis of 2008 saw the Government having to stand behind the financial system, and by 2010 the debt ratio had increased to 70.3%.
It has climbed continuously since, reaching 96.4% in May 2025, a record for any May, up from 95.9% the previous year.
Never mind the ratio. Our debt now sits at a mouth-watering £2,867 billion and results in debt servicing costs of over £100 billion.
That is a lot of cash that could have been invested in public services.
International comparisons make clear that investors impose a risk premium on UK debt.
The current 10-year UK Government gilt yield is 4.5%. In Germany, it is 2.6%. In Switzerland, a modest 0.4%. Our neighbour Ireland has a rate of 2.8%.
We are paying a price for the perception of investors of a lack of financial competence. We make jokes about Liz Truss and her cataclysmic approach to financial management, but her predecessors and successors hardly earn an A-plus.
The financial markets have delivered their judgment on UK PLC. We are all paying the price.
High interest rates crowd out public spending and also have a knock-on effect for business borrowers. The UK pays a premium and a higher cost of capital — additional costs that feed into higher prices.
If I were the Chancellor, I would be concentrating not just on the budget for the coming year but on addressing the structural weaknesses that are self-evident in the UK.
Hoping for growth will not do.
For the public, the catastrophic failure to deliver an economic policy that supports sustainable growth has meant declining living standards.
The last Westminster Parliament was the first in the post-war period during which living standards fell. I would not bet on this Parliament delivering a different outcome.
It is little wonder the Tories paid a price at the UK General Election. But what next if Labour fails to deliver in this Parliamentary cycle?
With an increasingly discontented population, the potential for populist parties is plain to see. The rise of Reform ought to worry all of us in the mainstream parties. The threat of a Reform government cannot be discounted.
What does this mean for Scotland?
For the SNP Government, whose budget is largely based on Barnett consequentials, it means an ongoing squeeze on real-terms spending.
The 2026 election will largely focus on devolved responsibilities, but the capacity to deliver over the next Parliament will be constrained by the UK financial settlement.
Politics ought to be about hope. The SNP can seize the opportunity to paint a landscape showing how things could be different in Scotland.
I have previously argued for the establishment of an industrial council.
It is much needed. Or, if one is not to be established, the SNP at the very least needs to set out how it will drive a step change in investment, jobs, and growth.
We have the opportunity to drive economic opportunity from our massive potential in green energy.
Not green energy in itself, but using that power to create a sustainable green industrial future — building on our strategic opportunity to create a competitive advantage from affordable green energy.
Doing our bit for net zero while creating the circumstances for a sustainable increase in economic growth.
When we talk about independence, it is not about an abstract concept. It is about transforming life chances.
More of the same within the UK — low growth and public services under pressure — can be broken.
The SNP needs to spell out how it can change the landscape and unlock economic growth by harnessing our natural resources and, of course, our human capital.
There is a better way.
It is up to our leaders to chart it.
Ian Blackford was SNP MP for Ross, Skye and Lochaber from 2015 to 2024, and served as the party's Westminster leader from 2017 to 2022.