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Pressure rises on Reeves as government borrowing costs hit 27-year high - THE GUARDIAN
Britain’s long-term borrowing costs have hit their highest level in 27 years, intensifying the pressure on the chancellor, Rachel Reeves, before the autumn budget.
The yield, or interest rate, on 30-year UK government debt hit 5.723% on Tuesday. That is its highest level since 1998, indicating that it will cost the UK more to borrow from the markets, above the previous 27-year high of 5.649% set in April.
Yields, which rise when a bond’s price falls, are a measure of the interest rate that investors demand when lending to a government or company.
The UK 30-year bond yield has been rising steadily over the last year, amid a wider global sell-off in long-term government bonds, which gathered pace on Tuesday. Analysts have blamed that sell-off on rising inflationary expectations – meaning lenders seek a higher rate of return.
The pound also weakened on Tuesday, falling by 1.8 cents against the US dollar to $1.3365, its worst day since early April, when Donald Trump launched his global trade war.
Economists are also concerned that Reeves may announce tax rises in the autumn budget; the City consultancy Capital Economics has predicted the chancellor may have to raise £18-28bn in the autumn budget, mostly via higher taxes, to meet her fiscal rule with a buffer of £9.9bn.
Rising borrowing costs are a blow to the UK chancellor, as they eat into the limited fiscal headroom available to the Treasury. This may force Reeves to consider tax rises, or spending cuts, to ensure she still hits her fiscal rule to have debt falling in five years’ time.
In the UK, opposition to proposed welfare cuts has highlighted the challenge in cutting government spending.
“Gilt yields have risen again in recent days, reflecting concerns that further tax increases from already high levels could damage growth, add to inflation, and still leave a sizeable hole in the public finances. Markets appear less focused on Treasury rhetoric and more on whether the government can present a credible plan to control spending,” said Mark Dowding, the BlueBay chief investment officer at RBC BlueBay Asset Management.
“The central issue is the perception that welfare expenditure remains on an unsustainable path. Without action in this area, confidence risks eroding further.”
“While rumours around tax policy add to the noise, the underlying challenge is structural and relates to whether the UK can avoid slipping into a worsening fiscal position,” Dowding added.
