A spectre is haunting British politics, and it's not the ghost of fiscal responsibility - it's the bond markets. Chancellor Rachel Reeves recently warned that a Labour leadership contest would unleash the wrath of investors who trade UK government bonds, also known as gilts. The mere suggestion by Andy Burnham that governments should stop being "in hock" to bond markets prompted shriller warnings: the bond vigilantes, we're told, would punish him just as they punished Liz Truss's mini-budget, selling gilts and hiking borrowing costs until he dropped any plans for transformative public investment.

This logic, if accepted wholesale, turns us into "choiceless democracies," as economist Thandika Mkandawire warned, where democratic mandates are vetoed by investors. Burnham has already reasserted his commitment to fiscal rules - a sign of the bond markets' continued grip. But there's another way. Progressive politicians should start by holding their nerve: bond market tremors are often driven by global factors. They should also understand what bond vigilantes actually want - austerity, because their profits are highest when the economy slumps and interest rates fall, boosting gilt prices. Conversely, a mild selloff often signals investors expect government spending to deliver growth. Good news for the economy, bad news for shifty bond holders.

Since public and investor interests aren't always aligned, governments must explore other financing options: scrutinising the Bank of England, getting rid of inflation-linked bonds, and repurposing Britain's pension funds. The Bank of England, though independent, is run by conservative technocrats protective of the status quo. After 2008, it became the gilt "market maker of last resort," buying when nobody else would. It also embarked on massive quantitative easing (QE) during the 2008 crisis and Covid-19 pandemic. By September 2022, having become the biggest gilt owner, it announced active quantitative tightening (QT) - selling gilts to fight inflation from the war in Ukraine. When bond investors warned this would hike government borrowing costs, the Bank stopped consulting them, ignoring other large central banks that kept bonds until maturity.

Since 2022, the Bank has sold £134bn in gilts, nearly halving its share of UK gilt holdings. This year alone it sold £7.6bn, with another £12bn planned. Investors calculate active QT has added up to 0.7 percentage points to UK borrowing costs - call it the "Bailey premium," after Bank governor Andrew Bailey. Without it, the UK would borrow cheaper than the US. The current impasse partly stems from Trussgate: her mini-budget amplified a problem in UK pension funds that had made gilt bets with borrowed money. When this threatened financial stability, the Bank offered only two weeks of capped support, then walked away from its backstop commitment. When Truss resigned, the Bank likely calculated that a commentariat unfamiliar with gilts would blame bond vigilantes rather than the Bank's own decisions. Separately, the Bank presides over another timebomb: since 2022, it has passed more than £100bn in losses on its gilt holdings to the UK Treasury, with more to come - again, not the policy of other central banks.

Further increasing costs are inflation-linked gilts, or "linkers," which force the UK to compensate investors for higher inflation. When the Bank misses inflation targets, the government pays. Britain has about a quarter of its bonds inflation-pegged, more than twice as many as Italy or France. Since the 2022 Russia price shocks, the government has paid a staggering £153bn in additional debt service. A progressive government must enlist the Bank in an orderly exit from linkers under a new monetary-fiscal coordination framework. Finally, pension funds: the 2012 coalition's auto-enrolment in defined contribution schemes means workers bear investment risks, and these funds prefer high-yielding stocks and private equity over less lucrative gilts. The Office for Budget Responsibility estimates pension funds will halve their gilt holdings over the next decade, adding about £22bn in annual debt interest costs. This political choice can be reversed: the recent Pension Schemes Act 2026 gives governments power to mandate pension fund investments in the UK economy, channelling savings towards public ownership of housing, water, and transport.

If the UK wants transformative change, it needs a new democratic model of central banking that weakens bond vigilante power. Making the Bank of England serve the common good again, undoing borrowing mistakes, channelling workers' capital into public essentials - these are hard political choices, but they exist. Changing the status quo of managed British decline was never going to be easy.