Borrowing costs hit the highest level for more than a quarter of a century yesterday – meaning Rachel Reeves is on the brink of breaking her fiscal rules.
In yet another setback for the Chancellor in the wake of the Budget, the yield on 30-year gilts topped 5.25 per cent 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’s ill-fated mini-Budget in 2022 – when Labour repeatedly claimed the Tories ‘crashed the economy’.
The reaction on bond markets at the time played a major role in Ms Truss’s downfall as rising gilt yields pushed up 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 of tax hikes alongside increased spending, borrowing and debt in her first Budget in October.
The yield on 30-year gilts was around 4.35 per cent in mid-September, while the ten-year yield has risen from close to 3.75 per cent to almost 4.7 per cent – higher than the peak under Ms Truss.
Got any spare change? Britain has seen borrowing costs climb to their highest level in 27 years as the Chancellor plans to borrow more while raising taxes
Gilts or bonds are parcels of debt the government sells to investors when it needs to raise money.
Experts last night warned Ms Reeves is on the brink of breaking her own fiscal rules – and being forced into more tax hikes – due to the surge in borrowing costs and slowdown in growth.
Shadow Chancellor Mel Stride said the highest gilt yields in 27 years were ‘yet more evidence Labour have driven our economy into a ditch’.
He added: ‘They talked it down. They taxed the life out of it. They’ve racked up borrowing. They killed growth. Now we are all paying the price with higher inflation, fewer jobs and lower wages.’
Tory business spokesman Andrew Griffith said the cost ‘will be paid by businesses and households in higher interest rates’.
The UK is on course to issue almost £300 billion of debt this year – second only to during Covid.
The borrowing frenzy has pushed up yields as investors wary of the state of the public finances demand a higher rate of return 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 an increase in the minimum wage.
Business and consumer confidence has also crashed and the economy – the fastest-growing in the G7 when Labour came to power – is now stagnating.
Analysts at Capital Economics warned Ms Reeves may be forced into another tax raid as borrowing costs rise and the economy slows.
A report by the consultancy said the jump in borrowing costs has wiped out £8.9 billion of the Chancellor’s so-called ‘headroom’ of £9.9 billion to meet her fiscal rules.
Authors Ruth Gregory and Alex Kerr said in the study that Ms Reeves ‘could soon face a nasty choice of breaking her fiscal rules or announcing more tax rises’.
