UK (Parliament Politics Magazine) – UK long-term borrowing costs hit 27-year high at 5.68%, forcing Chancellor Rachel Reeves to consider tax hikes or spending cuts before the autumn Budget.
As reported by The Guardian, Rachel Reeves faces pressure as UK long-term borrowing hits a 27-year high ahead of the autumn Budget.
How are rising long-term borrowing costs affecting the budget?
The yield on 30-year UK government debt hit 5.680% on Tuesday, marking the highest since 1998. Borrowing costs now exceed the previous 27-year high of 5.649% set in April.
Bond yields rise as prices drop, showing the interest investors demand when lending to governments or firms. Over the last year, the 30-year UK government bond yield climbed steadily amid a global long-term bond sell-off.
Experts blame the market drop on inflation, forcing lenders to seek higher returns. Bond prices dropped online, prompting traders to move into safe-haven assets. Gold surged to $3,508 (£2,607) an ounce, while silver climbed past $40 for the first time since 2011.
What impact do higher borrowing costs have on Rachel Reeves’ plans?
Concerns mount over fiscal sustainability as US President Donald Trump’s recent tax cuts and spending bill could add trillions to the national debt.
In the UK, resistance to proposed welfare cuts highlights the challenge of cutting government spending. Higher borrowing costs put pressure on the chancellor, limiting available fiscal space for the Treasury. Ms Reeves may need to consider tax increases or spending cuts to meet the debt decline in five years.
The rise in borrowing costs coincided with the City reacting to Prime Minister Sir Keir Starmer’s Downing Street reshuffle, where Darren Jones was made chief secretary to manage day-to-day Treasury and PM tasks.
What did Simon French say about markets reacting to Downing Street changes?
Simon French, the chief economist and head of research at the investment bank Panmure Liberum, said,
“The immediate market reaction is not exactly a vote of confidence on these moves.”
He said,
“The immediate market reaction is not exactly a vote of confidence on these moves.”
What did Rob Morgan say about bond market pressure on UK finances?
Rob Morgan, the chief investment analyst at Charles Stanley, stated,
“Bond market trends are adding to the pressure on government finances. Escalating global inflation concerns and fewer price-insensitive buyers such as pension funds have helped push up yields on UK government bonds, adding to the question marks around the UK’s fiscal credibility.”
He added,
“At this sort of level, any misstep such as a clumsy handling of previously ‘iron clad’” fiscal rules could be severely punished by markets, risking a ‘doom loop’ of ever higher borrowing costs, greater economic pain, and lower tax revenue. The chancellor needs to keep bond markets onside as a matter of priority, as waning investor confidence from this point could be hugely damaging.”
What did James Bilson say about UK bond risks and fiscal outlook?
James Bilson, a bond strategist at Schroders, said global bond yields have shifted, citing factors such as the risk to Fed independence.
He stated,
“But with the very weak starting point of the UK’s fiscal outlook and the lack of detail so far about how the Government will sustainably address this, we believe the UK is particularly vulnerable to these global dynamics.”
Mr Bilson added,
“The fundamental solution to getting UK bond yields down remains a credible plan to address poor public finances and an improvement in inflation. For now, we are not seeing either.”
What did James Athey say about government debt and inflation risk?
James Athey, a bond trader at Marlborough, said the government’s problems were “fairly obvious.”
He stated,
“The Government is too big, the tax share of the economy is too big and yet still not big enough to cover expenses, and the economy is weak and unproductive.”
Mr Athey added,
“Difficult decisions are needed, and this government has already demonstrated they are unwilling or incapable of making them. With inflation as high as it is, investors are demanding a higher risk premium at the long end.”
Sir Mel Stride’s views on the Number 10 reshuffle and Labour’s economic handling
Sir Mel Stride, the shadow chancellor, stated that the reshuffle at Downing Street was “like rearranging the deck chairs on the Titanic.”
He stated,
“Darren Jones, who helped Rachel Reeves mastermind Labour’s economic masterclass of doubled inflation, soaring borrowing and £40bn in tax hikes, is now in charge of delivery.”
Mr Stride added,
“Now promoted to steer the ship – when it’s already halfway under. With more taxes on the way, Labour’s ship is sinking fast.”
Key reasons for rising borrowing costs
When inflation rises, central banks increase interest rates, raising borrowing costs. Large government debt and deficits push investors to demand higher returns.
Political or economic risks further raise bond yields. This increases borrowing costs across the economy.