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 on Tuesday to 5.62%, 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 confront a deficit of between £20bn and £40bn in the autumn budget. To maintain fiscal rules and a £10bn buffer, she may need to find £30bn to £50bn through tax increases, spending cuts, or additional borrowing. Higher debt bills and U-turns on proposed welfare cuts have fuelled expectations of tax rises later this year.
Investors fear persistent high inflation in the UK, devaluing their holdings. Catherine Mann, a Bank of England rate-setter, warned that policymakers underestimate “inflation persistence,” while Mohamed El-Erian of Queens’ College, Cambridge, highlighted stagnant productivity as a core problem. He noted the UK lacks the dynamic private sector of the US and the safety nets of France.
Jagjit Chadha, an economics professor at Cambridge, described the situation as “dire” and urged 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 and dwindling demand to lend to the UK. However, former Bank of England deputy governor Charlie Bean called talk of an imminent IMF bailout “over the top,” though he criticised the chancellor for committing to not raising main tax rates and maintaining a small fiscal buffer.
