Bond markets discipline all governments and even the aspirations of their supporters. But, argues Thomas Foster, their mystical grip on the economy can be conquered
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Wednesday 03 December 2025
Do the markets restrict the government’s actions? (Photo: Wikimedia commons)
In the run up to Rachel Reeves’ budget, media outlet after media outlet churned out articles speculating about how “the market” would react.
They spoke of “the market” as if it’s a mystical, all-powerful beast that must be satisfied. This influence of financial markets on this government isn’t an accident, but has been enabled by the balancing act that Labour has set itself.
Its commitment to fiscal rules, such as the promise to reduce government debt, means the bond markets have come to dominate.
These are markets that trade government bonds—IOUs that governments sell to investors to borrow money.
Ideologically, social democratic parties often wield the threat of a revolt on the financial markets to dampen the expectations of their supporters.
Their threats are usually exaggerated to suit party leaders’ need. Even so, the dangers can be very real.
We can look back to what happened to former Tory prime minister Liz Truss’ government in autumn 2022.
She announced huge tax cuts for bosses and the rich, paid for by a significant increase in government debt. It provoked a huge market backlash, causing to the value of government bonds to collapse and cost of state borrowing to soar.
Pension funds, many of which have large investments in government bonds, nearly went bankrupt. Truss was humiliated and resigned as prime minister.
There is an alternative strategy. But to know how bond markets can be beaten, it is necessary to understand how they function.
A bond is effectively a promise to pay. A government issues a bond and sells it for, say, £100 to an investor that purchases it.
In return, the government promises to pay back the full price of the bond at a certain future date, making fixed regular interest payments along the way. For example, it could be £10 a year on a bond worth £100—a rate of 10 percent. This rate must be competitive with interest rates offered by other investments if anyone is to buy it.
Bond interest rates can be influenced in the short run by interest rates set by central banks such as the Bank of England.
The purpose of a government selling a bond is to raise funds to cover the difference between how much money the government gets from taxes and how much it spends.
After a bond has been issued by the government, investors can trade it. Prices can go up and down and a market of commercial banks, central banks, pension funds and overseas investors, is established.
We should ignore the mystifications—these markets just express the interests of corporations and traders. When investors don’t want to buy bonds from the government, decreasing demand, or start selling the bonds they hold, increasing supply, it lowers prices.
If a price of an existing bond goes down, new investors can pay less for it and get more of a return on each pound invested. It means that when the government issues new bonds, investors can demand higher rates of return.
As states rely on bonds to finance spending, they respond by upping interest payments to keep investors on side. The result? The government pays more to borrow money, creating higher government debt and violating its self-imposed fiscal rules.
This impacts the national budget—higher debt interest payments means less room for other spending. So instead of more money for nurses and teachers, more money goes into the pockets of wealthy bankers and investors.
This shows the disciplining power of bond markets, through their integration with the state. They can threaten debt crises if they view debt-financed government spending to be too high.
There are trends that have heightened the influence bond markets have on the state.
Government borrowing has soared since 2008, with significant increases in debt interest costs—trends worsened by rising inflation and weak growth.
Currently, government debt sits at £2.9 trillion, close to 100 percent of gross domestic production (GDP). In 2008, it was 36 percent of GDP. Of this £2.9 trillion debt, £2.6 trillion is in outstanding government bonds.
Overseas investors hold 31 percent of these bonds. These volatile investors will happily sell British government bonds if they can get a better deal elsewhere.
And yearly debt interest spending reached £106 billion for the 2024-25 financial year. At 8 percent of total government spending, it means nearly £1 out of every £10 spent is spent on interest.
Labour has promised to reduce government debt and close the “fiscal blackhole”. But as Marxist economist Michael Robert said, “The trouble is that this hole is imaginary.
“It’s in the minds of the government and the financial sector and it varies in size depending on how fast the British economy is growing.”
The issue is that the British economy is stagnating, trapped in low profitability.
“This is reflected in low productivity growth, a mass of unprofitable zombie firms undermining investment, intensifying class inequality, unstable accumulations of credit and bloated, fragile financial systems,” writes Marxist economist Joseph Choonara.
Amid stagnation, government debt has grown hugely, and with it, the power of bond markets. Yet financial markets should be taken on, not conceded to as Labour is doing.
One way to do this is to increase the tax base of the government—higher tax revenues would reduce the need to borrow.
In other words, a sizable tax on the rich and bosses’ profits would mean less need for the government to issue bonds to cover the difference between revenue and spending.
Such a tax is entirely possible. The Office for Budget Responsibility’s own forecast found that the effective tax rate on labour income sits at 40 percent. The effective tax rate on corporate profits sits at 17 percent. An equalisation of this would bring in huge sums of money for the government.
Another way is the democratisation of banks. A banking system made up of a network of publicly‑owned, co-operative or community banks, could undermine the influence of capitalist firms and traders.
These banks could act as large domestic sources of finance for the government, which could mandate or incentivise such banks to hold government bonds.
Currently, multinational commercial banks can lead the bond sell-offs that cause borrowing costs to spike. A democratised banking system would change the make-up of who holds government debt. It would break up the private sector’s power to affect bond interest rates.
A government can also implement capital and exchange controls—restrictions on the flow of money or goods.
It could implement limits on money transfers abroad or conversions of domestic currency into foreign currency. A requirement could be set for foreign money to stay in the country for a certain time period.
This stops investors from punishing the government by rapidly exiting the country and driving bond rates sharply up.
Instead, the selling is contained within the domestic system, minimising the impact of investors taking their money away. It could establish administrative approvals for overseas sales of government bonds, or transaction taxes on bond trades that makes selling them more expensive.
These policies could work to undermine the capacity of firms and traders to exert power over the government.
But they would also be taken by the capitalist class as a declaration of war. The bosses and the rich would carry out a heavy assault on any political party that adopted these policies, doing everything they could to destroy it.
Resisting these attacks, and to reach a point where these policies could be feasible, would require a shift in the balance of class forces.
This would mean a mass movement of working class people, without which any left government would remain isolated and weak. It would mean building up power beyond any state institutions such as parliament.
Mass struggle on the streets—and crucially in workplaces through strikes—could force concessions from the capitalist class.
It would create a fear of working class action that would force the capitalist class into compromise. If workers could take power into their hands, such as in the financial sector, it could push through the changes.
All this give rises to the potential to go beyond financial markets altogether. It could break the whole system of profit and remove the power of the bosses and the rich.