The cost of UK government borrowing has surged to near a 27-year high, intensifying pressure on Chancellor Rachel Reeves to address the public finance deficit ahead of the autumn budget. The yield on the UK’s 30-year bond rose by eight basis points to 5.62% on Tuesday, approaching the April spike of 5.66%—the highest since 1998.
Rising borrowing costs have pushed the annual cost of financing UK government debt to over £100bn, nearly 10% of the annual budget. Economists warn that the UK faces unique financial strain amid higher welfare and healthcare costs and an ageing population, which are driving up borrowing across industrialised nations. Reeves is expected to face a deficit of between £20bn and £40bn, requiring £30bn to £50bn in tax increases, spending cuts, or higher borrowing to maintain fiscal rules.
Investor concerns over persistent inflation have been echoed by Bank of England policymaker Catherine Mann, who said UK policymakers underestimate “inflation persistence.” She noted a tension between inflation and weak growth, urging the Bank to maintain high interest rates before cutting aggressively. Mohamed El-Erian, economic adviser to Allianz, highlighted the UK’s lack of domestic and external shock absorbers, citing stagnant productivity growth averaging a quarter of historical levels over the past 15 years.
Jagjit Chadha, an economics professor at Cambridge, described the situation as “dire,” urging Reeves to “get a grip” on finances. He warned that a global economic shock could force the UK to seek an IMF bailout, citing a lack of control over public debt, high debt service costs, and dwindling demand to lend to the UK. “We are vulnerable to a global interest rate shock or a collapse in confidence,” he said.
Former Bank of England deputy governor Charlie Bean dismissed talk of an imminent IMF bailout as “over the top,” but criticised Reeves for committing not to raise main tax rates and maintaining a “minuscule” £10bn buffer. The Treasury plans to auction about £300bn of debt this financial year, with a £5bn auction scheduled for Wednesday.
