Chancellor Rachel Reeves faced a setback as government borrowing costs surged to levels not seen in nearly three decades. The interest rate on 30-year UK gilts spiked to 5.70% amid worries about the economic outlook and global government borrowing increases.
These long-term borrowing costs, the highest since 1998, are creating additional challenges for Ms. Reeves leading up to the autumn Budget. The substantial burden of servicing the national debt amounts to over £7 billion in July alone.
The UK is grappling with the highest borrowing costs among G7 nations due to the extensive debt and persistent inflation rates. Although borrowing costs are also climbing in other advanced economies like the US, the rates on 10-year UK gilts rose to 4.8%, remaining below the peak reached earlier this year.
Financial experts caution that these escalating costs could compel Ms. Reeves to make difficult decisions in her upcoming Budget. Nigel Green of deVere Group emphasized the importance of fiscal credibility and suggested that tough measures like tax hikes or spending cuts may be necessary to align with fiscal rules.
Market analysts highlight the pressure on Ms. Reeves to generate revenue without dampening growth expectations. Concerns over potential tax increases have started impacting market behavior, with implications for the UK economy’s long-term stability.
The recent surge in gilts follows Prime Minister Keir Starmer’s reshuffling of his Downing Street team after a challenging period for the Government. Darren Jones, formerly Ms. Reeves’ deputy at the Treasury, has been appointed as the Prime Minister’s chief secretary, while James Murray will take his place as Treasury chief secretary.
Neil Wilson of Saxo Markets pointed out that the market response indicates investor skepticism regarding the Treasury’s commitment to its borrowing restrictions.