Rising government borrowing costs have pushed UK gilt yields to their highest level since 1998, potentially forcing Chancellor Rachel Reeves to implement additional public spending cuts at the upcoming March spring forecast.
The yield on 30-year UK debt climbed by 0.4 percentage points to reach 5.22%, surpassing the peak witnessed during the market turbulence following Liz Truss’s mini-budget in 2022. This significant increase threatens to eliminate nearly all of the £10 billion buffer the chancellor had maintained from the autumn budget.
Global borrowing costs have experienced upward pressure as investors grapple with persistent inflation concerns and the possibility that major central banks may delay interest rate reductions. The situation is further complicated by anxieties surrounding the potential inflationary impact of the US president-elect Donald Trump’s economic policies.
The British economy showed no growth in the latter half of the previous year, while inflation remains stubbornly above the Bank of England’s 2% target. Ruth Gregory, deputy chief UK economist at Capital Economics, estimates that the recent surge in borrowing costs has effectively eliminated £8.9 billion of the chancellor’s £9.9 billion headroom.
The Treasury has maintained that Reeves’s fiscal rules are non-negotiable, suggesting that any necessary adjustments would likely come through spending reductions rather than tax increases. This stance follows the chancellor’s autumn budget, which already introduced £40 billion in revenue-raising measures.
The challenging economic landscape is further emphasised by the Bank of England’s forecast of zero growth for the final quarter of 2024, with inflation expected to exceed the 2% target until at least 2027. These conditions have led investors to revise their expectations, now anticipating only two rate cuts in 2025, down from the four previously projected.
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