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While bond markets initially welcomed the British government’s new budget, confidence waned following projections that it would boost government borrowing. This serves as a sobering reminder for policymakers: large or growing fiscal deficits can crowd out private-sector demand.

LONDON – After a decades-long slumber, the bond vigilantes are back. The British bond market’s reaction to the new Labour government’s first budget underscores the complex challenges policymakers face in balancing large fiscal deficits with rising social, environmental, and geopolitical pressures. The risk that public borrowing could crowd out private-sector investment is both clear and immediate.