The cost of UK government borrowing has surged to its highest level since 1998, raising the pressure on Chancellor Rachel Reeves as she prepares for the autumn budget. The yield on 30-year government bonds, or gilts, has risen to 5.68%, reflecting mounting investor anxiety about the nation’s public finances. This increase means the government must offer a higher interest rate to attract buyers for its debt, making it more expensive to service the public debt and creating a larger fiscal black hole to fill.
The rise in borrowing costs comes after a challenging summer for the Labour government. Concerns over fiscal sustainability, coupled with persistent inflation, have spooked financial markets. Analysts point to a wider global sell-off in government bonds, but say the UK is facing specific domestic challenges. The pound also tumbled following the news, falling 1% against the US dollar.
The situation has been exacerbated by the sheer volume of debt the government needs to sell. The Debt Management Office (DMO) is expected to sell an estimated £297 billion of notes over the 2024-25 fiscal year, the second-highest on record. This high supply of bonds, combined with a decline in investor confidence, has driven prices down and yields up.
The rising costs will directly impact the Chancellor’s plans for the autumn budget. The government faces an estimated £51 billion black hole that needs to be filled. Higher borrowing costs will eat into the Treasury’s fiscal headroom, potentially forcing Reeves to consider unpopular measures to balance the books. This could include tax rises or spending cuts, both of which could prove difficult for a government facing a tight political landscape.
In a move seen by some as a pre-budget reshuffle, Prime Minister Keir Starmer has announced a major shake-up of his Downing Street team. Darren Jones, previously Reeves’ number two at the Treasury, has been moved to a new role as the Prime Minister’s chief secretary, with James Murray taking his place. The timing of the reshuffle, just before a critical budget, has led to speculation about the government’s economic strategy and its commitment to fiscal discipline.
Economists are warning that the autumn budget will be a “defining moment” for the UK. The government is caught between voters who do not want tax rises and its own backbenchers who are against spending cuts. Deutsche Bank’s chief UK economist, Sanjay Raja, estimates that a fiscal hole of £20-25 billion will need to be filled, and warns that any “misstep” in handling the fiscal rules could be severely punished by markets. The pressure is on for the Chancellor to deliver a budget that reassures investors while also delivering on the government’s domestic policy promises.
