UK poised to pay highest borrowing costs since 1998
The UK is set to pay the highest yield on new debt in nearly 30 years in a sign of the growing economic pressures facing the Chancellor John Healey as he draws up his first Budget.
The Debt Management Office is marketing a 30-year bond at 0.75 basis points over the yield of the government’s 2055 gilt, which would mark the steepest yield for any new debt since the body was created in 1998, Bloomberg reported.
Government borrowing costs globally have surged in recent weeks amid fears over persistent inflation from the impact of the Iran war on oil prices.
The rout in global bond markets has hit the UK harder than any other developed nation as investors fret over the sustainability of the country’s financial position. Yields on UK debt touched their highest level in decades last week.
Higher long-term yields also reflect worries that Andy Burnham’s premiership is unlikely to rein in government spending amid demands for more funding for the military and supporting people with the cost of living through winter.
Borrowing costs to surge to £137bn
But analysts have warned the Chancellor has little room for further borrowing and will be forced to hike taxes at his first Budget in order to stay within the fiscal rules, which state that day-to-day spending must match receipts by 2030.
Thomas Pugh, an economist at the accountancy RSM, said the headroom may have come down to as little as £11.5bn, mostly as a result of higher borrowing costs.
At the Spring Statement in March, the Office for Budget Responsibility said the Chancellor’s headroom against the fiscal rules was £23.6bn.
Just after taking power, Andy Burnham suggested there was “flexibility”’ in the fiscal rules for more borrowing. Capital Economics’ Ruth Gregory suggested that traders would only “tolerate” £15bn more in borrowing.
The decision from the DMO, which operates independently to the Treasury, could squeeze public finances. The government is already projected to spend more than £137bn in debt interest payments in 2030.
Healey admitted that borrowing costs were “too high” in a speech on Monday and insisted that growth was the “pathway out of indebtedness”.
Addressing MPs on Tuesday, Healey said the previous Conservatives were responsible for having “collapsed confidence in Britain’s fiscal strength”.
He also said Reform UK’s pledge to raise the tax-free personal allowance to £15,000 represented a promise the government “can’t keep”. He said such tax cuts would be left “under review”.