Britain's debt minister warns that excessive borrowing could lead to a backlash from investors

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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 Britain's Debt Management Office said ahead of a general election expected this year.

Sir Robert Stheeman, who has seen Britain's debt pile increase eightfold in his 21 years as the government's credit chief, warned that issuing bonds was becoming increasingly difficult and investors could increasingly exert a restraining influence on fiscal policy .

“Don’t kid yourself if you think you can develop policy in a vacuum without taking the market into account,” Stheeman told the Financial Times, reflecting on former prime minister Liz Truss’ ill-fated September “mini” budget 2022 after The gold market plunged into crisis. “In a world where we have to sell debt, policymaking cannot be separated from the reality of the market.”

His comments come as political parties prepare for an election campaign in which public borrowing plans are likely to play a big role. Sir Keir Starmer's Labor Party, which is leading in the polls, has watered down its pledge to spend £28 billion a year on green investment amid concerns about criticism over its impact on the UK's strained public finances might.

The plan still calls for additional annual net borrowing of £20 billion by the end of Parliament's first five years, and City fund managers have warned it could make markets “unsettled” and drive up government bond yields.

Stheeman said investors' increasing sensitivity to the size of the national debt was highlighted by the crisis in gilt markets that followed Truss' plans for unfunded £45bn tax cuts. Its chancellor, Kwasi Kwarteng, initially tried to shrug off the strong reaction from investors by saying “markets will react however they want” and has since claimed he was a “victim” of irrational bond markets.

But according to Stheeman, who oversaw a £4.5 billion sale of government bonds on the day the turmoil reached its peak and the Bank of England stepped in to stabilize markets, the incident showed how pointless it was is to tell investors they did something wrong.

“Markets are very human things, don’t rail against the market because all you do is rail against other people’s opinions,” he said. “The market sometimes takes the spotlight. . . it expressed a very, very clear opinion about what it thought.”

As head of the DMO since 2003, Stheeman is the government's key link to financial markets, raising billions of pounds every month from banks, asset managers and pension funds.

The 64-year-old plays down the “cliché” that investors act as shady bond watchdogs and call the shots on government policy.

In most cases, pricing in a market like gilts, where the government has control over its own currency, simply reflects investors' expectations of the future direction of interest rates.

However, this assumption collapses when the “credibility” of fiscal policy is called into question, Stheeman said. Rising national debt in the UK and elsewhere has led to a “greater focus” on that credibility, he said.

Since Stheeman joined the DMO, Britain's debt mountain has grown from around £350 billion to £2.7 trillion. The agency plans to sell £237 billion of government bonds this financial year, far more than the £26 billion in his first year in office.

Despite historically high borrowing needs and the BoE's plans to increase sales of government bonds purchased under its quantitative easing program to $100 billion this year.

“The fact that yields have not risen uncontrollably in recent years shows that not only am I not worried – the market is not particularly worried either,” he said. “I am confident enough that the UK government bond market is resilient and functioning well not to worry.”

Following the gilt market turmoil in 2022, Stheeman said it was “very remarkable how quickly international investor confidence has been restored”.

Borrowing costs in the UK rose sharply last year, with 10-year Treasury yields peaking at 4.75 percent in August, as investors bet the UK would need to keep interest rates higher for longer to avoid a stubborn inflation problem to get the grip. But since then, bond yields have fallen sharply, so that the yield on 10-year government bonds is now 3.6 percent.

The government has said it will appoint Stheeman's successor early this year, before he retires at the end of June. He has led the DMO for most of his time since his departure from the BoE – where his wife Elisabeth is a member of the Fiscal Policy Committee – in 1998. His salary was £160,000 last year, according to the agency's latest annual report.

The DMO has no influence on how many government bonds are sold, but is responsible for implementing the government's plans at the lowest possible borrowing costs.

In 2020, Parliament's Treasury Select Committee questioned whether its syndications, large sales in which a group of large banks are paid to stimulate demand from investors, represented poor value for money for taxpayers – an implication , which Stheeman strenuously denied.

“For this role and also for my successor, it is important to maintain proximity to the market, but also a healthy distance,” he said. “We must never allow ourselves to be captured by the market – we are here to serve the taxpayer.”

Additional reporting by Jim Pickard and Sam Fleming in London