Chancellor Rachel Reeves faced a setback as government borrowing costs surged to their highest level in nearly three decades. The interest rate on 30-year UK gilts peaked at 5.70% on Tuesday, reflecting concerns about the economic outlook and following an increase in borrowing costs for other governments.
The current long-term borrowing rates, the highest since 1998, are adding pressure on Reeves ahead of the upcoming autumn Budget. Servicing the national debt has been a significant financial burden, exceeding £7 billion in July alone.
With the UK having the highest borrowing costs among G7 countries due to substantial debt and persistent inflation, the rates on 10-year UK gilts climbed to 4.8%. Although below the 16-year high of 4.93% in January, this increase may prompt politically challenging decisions for Reeves in the upcoming Budget.
Financial experts cautioned that Reeves might need to implement tough measures like tax hikes or spending cuts to demonstrate fiscal responsibility and address the rising debt levels. The bond market’s message underscores the importance of maintaining fiscal credibility.
Market analysts highlighted the pressure on Reeves to raise funds without hampering growth expectations, as fears of policy adjustments could hinder economic progress. Concerns about potential tax hikes have already impacted market sentiments, with implications for the pound’s value and potential Bank of England interventions.
The recent spike in gilts follows Prime Minister Keir Starmer’s reorganization of his Downing Street team after a demanding summer for the Government. Darren Jones, formerly Reeves’ deputy in the Treasury, has assumed the role of the Prime Minister’s chief secretary, with James Murray taking over as Treasury chief secretary.
Neil Wilson, UK investor strategist at Saxo Markets, emphasized that the market movement reflects investors’ doubts about the Treasury’s commitment to strict borrowing regulations.
