Borrowing costs in Britain hit 27-year high as Reeves faces hit to government bonds
Borrowing costs hit their highest level in more than a quarter of a century yesterday – meaning Rachel Reeves is about to break her budget rules.
In yet another setback for the Chancellor in the wake of the budget, the yield on 30-year government bonds rose above 5.25 percent for the first time since 1998.
The yield is a key measure of how much it costs the government to borrow and is now higher than it was after Liz Truss’ ill-fated mini-budget in 2022 – when Labor repeatedly claimed the Tories had ‘crashed the economy’.
The reaction in the bond markets at the time played a major role in Truss’s demise, as rising government bond yields increased the cost of borrowing for households, businesses and the government.
But borrowing costs are now even higher, having risen steadily since Ms Reeves announced £40 billion in tax rises in her first budget in October, alongside higher spending, borrowing and debt.
The yield on 30-year government bonds stood at about 4.35 percent in mid-September, while the 10-year yield has risen from almost 3.75 percent to almost 4.7 percent – higher than the peak under Ms Truss.
Do you have any change? Britain has seen borrowing costs rise to their highest level in 27 years as the Chancellor plans to borrow more while raising taxes
Gilts or bonds are debt packages that the government sells to investors when it needs to raise money.
Experts warned last night that Ms Reeves is about to break her own budget rules – and be forced into more tax increases – due to the surge in borrowing costs and the slowdown in growth.
Shadow Chancellor Mel Stride said the highest government bond yields in 27 years were ‘further evidence that Labor has driven our economy into a ditch’.
He added: “They talked it out. They burdened its life. They built up loans. They killed the growth. Now we are all paying the price with higher inflation, fewer jobs and lower wages.”
Tory business spokesman Andrew Griffith said the costs would be “borne by businesses and households in the form of higher interest rates”.
Britain is on course to issue almost £300 billion in debt this year – post-coronavirus crisis.
The borrowing frenzy has pushed yields higher as investors wary of the state of public finances demand higher returns from the government to compensate for the extra risk.
The Chancellor has faced a wave of criticism since the Budget as businesses baulk at the prospect of higher taxes alongside a minimum wage increase.
Business and consumer confidence have also collapsed and the economy – the fastest growing in the G7 when Labor came to power – is now stagnant.
Analysts at Capital Economics warned that Ms. Reeves may be forced into another fiscal attack as borrowing costs rise and the economy slows.
According to a report from the consultancy, the rise in borrowing costs has wiped out £8.9 billion of the Chancellor’s so-called £9.9 billion ‘headroom’ to meet her budget rules.
Authors Ruth Gregory and Alex Kerr said in the study that Ms Reeves “could soon be faced with a dire choice: break her budget rules or announce even more tax increases.”