Experts have warned that a change in Prime Minister could drive UK government borrowing costs even higher, as Keir Starmer's latest bid to save his premiership failed to fully reassure bond markets.
Government borrowing costs rose following Starmer's fresh attempt to secure his position. The yield on 10-year UK government bonds, known as gilts, rose to just under 5%, while the rate on 30-year bonds increased to 5.69%. Shorter-term borrowing costs had earlier reached a 28-year high of 5.77% last week, ahead of local elections and amid ongoing concerns about the Middle East conflict. These levels have not been sustained since the late 1990s.
The UK is heavily reliant on foreign investors, who hold more than a quarter of the national debt. With national debt standing at £2.9 trillion and the government expected to spend £110 billion this year on interest alone, even small movements in borrowing costs can have a significant impact. For comparison, France's borrowing costs are 3.6%, Italy's 3.7%, and the US's 4.39%. Greece, one of the worst affected by the 2008 financial crisis, has costs just under 3.8%. If UK costs fell to French or Italian levels, taxpayers could save over £20 billion a year.
Financial markets had largely factored in last week's electoral losses for Labour, but attention is now on the political fallout. Experts warn that a change of leadership, potentially including Chancellor Rachel Reeves, could push borrowing costs higher. Enrique Díaz-Alvarez, chief economist at financial services firm Ebury, said: "Investors are betting that Labour's overwhelming defeat will not end Starmer's premiership just yet, but pressure on the prime minister looks set to intensify. A potential lurch to the left is what markets fear most, as this could mean higher taxes, heavier gilt issuance, and a broader fiscal risk premium baked into UK assets."
Tom Stevenson, investment director at Fidelity International, noted: "It would be easy to overstate the issue. The gilts market remains open for business, and investors are still willing to fund the UK government's spending plans. But UK bond yields are higher than in comparable countries, and the uncertainty puts us fairly low down the table of attractive destinations for international capital."
Susannah Streeter, chief investment strategist at the Wealth Club, commented: "Keir Starmer's address hasn't calmed bond markets. There is still a sense of jitters as concerns about political instability collide with inflationary fears from the Middle East conflict. His speech projected a 'keep calm and carry on' message, but it lacks the substance needed to keep Labour MPs on side." She added: "A change of Prime Minister could prompt wider turmoil at the top of government, potentially derailing the Treasury's focus on fiscal rules. Political turbulence is never good for attracting long-term investment. The rise in gilt yields further constrains the government's ability to support households hit by the Middle East conflict. The longer doubts persist over stability, the greater the risk that market anxiety perpetuates the problem."
