UK Borrowing Costs Hit Highest Level Since 1998, Pressure Mounts on Chancellor Reeves

The UK government is facing growing financial pressure as long-term borrowing costs have surged to their highest level in nearly three decades. The interest rate, or yield, on 30-year government bonds jumped to 5.698 percent, a level not seen since 1998. This means it has become significantly more expensive for the government to borrow money, raising concerns about how Chancellor Rachel Reeves will manage the nation’s finances ahead of her first Budget.

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Market reaction has been swift, with the pound falling more than one percent against the dollar. Investors appear worried about the government’s fiscal position, leading to a sell-off in government bonds. Susannah Streeter of Hargreaves Lansdown said Reeves had been “dealt a warning” by investors, warning that choices ahead are highly difficult. She added that confidence could be undermined if the government’s decisions on taxation and spending appear rushed or poorly considered.

Labour’s election manifesto pledged not to raise income tax, VAT, or national insurance for working people. However, speculation has been building over which taxes Reeves could adjust in the Budget. Possible moves include extending the freeze on income tax thresholds beyond 2028 or reforming property taxes, both of which could raise revenue.

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The chancellor has set strict borrowing rules that are now harder to maintain as interest costs rise. Reeves has pledged that by 2029-30, day-to-day spending will be fully funded by taxes rather than borrowing, and that debt as a share of national income will begin to fall by the end of this parliament. However, her financial buffer is just £10 billion, leaving her with limited room for error.

The Office for Budget Responsibility will factor in bond yields when it produces updated forecasts for the autumn Budget. While 30-year yields have surged, it is the 10-year bond yield that matters for the official outlook. These remain lower than earlier this year but are still higher than in March, meaning debt costs are set to rise compared with previous forecasts.

Global factors are also playing a role. Investors are nervous about ongoing trade tensions between the US and China, as well as the economic impact of US President Donald Trump’s trade policies. Meanwhile, domestic concerns about the future path of UK inflation and interest rates are adding further strain. Economists note that pension funds, traditionally big buyers of long-term government debt, are purchasing fewer gilts, further driving yields higher.

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