- The 30-year gilt yield reached 5.89 per cent, its highest level since 1998.
- The 10-year gilt yield climbed to its highest level since the 2008 financial crisis.
- Higher debt costs could leave Chancellor John Healey with far less room for new spending.
Andy Burnham’s first Budget is facing a tougher financial backdrop after the cost of long-term government borrowing climbed to its highest level in 28 years.
The yield on 30-year UK government bonds, known as gilts, reached 5.89 per cent on September 1, its highest level since March 1998. The benchmark 10-year gilt yield also climbed to about 5.25 per cent, its highest point since June 2008.
For the government, this is more than a bond-market number. Higher gilt yields mean it costs more to finance Britain's debt, potentially eating into the money available for the spending plans Burnham and Chancellor John Healey are expected to set out in their first Budget on October 28.
The Budget headroom is getting squeezed
Economists estimate the impact could be significant. Deutsche Bank's chief UK economist, Sanjay Raja, said the government's headroom against its fiscal rule could fall from about £26 billion at the spring forecast to £13.8 billion if current gilt yields were used in the calculations.
That would leave Healey with considerably less room to introduce measures aimed at easing the cost of living while still maintaining the government's fiscal rules. Raja suggested the government would want to preserve at least £10 billion of headroom to reassure financial markets.
The pressure is arriving from several directions.
A global sell-off in government bonds has pushed borrowing costs higher across major economies, while rising oil prices linked to the Iran conflict have renewed concerns about inflation. Higher inflation could make central banks less willing to cut interest rates and, in some cases, raise the possibility of further increases.
There is also growing competition for investors' money. Major technology companies are borrowing heavily to fund their expansion, particularly around artificial intelligence and data centres. That gives investors more alternatives to government debt and can push up the return they demand for lending to governments.
Japan's 10-year bond yield also reached its highest level since the 1990s, while US and European markets have faced similar pressure.
For Burnham and Healey, the timing is particularly awkward. The government has already promised measures to help households deal with the cost of living, while higher borrowing costs could make those commitments harder to fund without raising taxes or cutting spending elsewhere.
Downing Street said fiscal discipline remained the "bedrock" of economic stability and national security. A spokesperson also said the government was cutting the deficit faster than any other G7 economy.
But the bond market is now setting a tougher test for those promises. If gilt yields remain elevated when the Office for Budget Responsibility prepares its forecasts, the government could enter the October 28 Budget with substantially less financial room than it expected earlier in the year.
