UK 10-year government borrowing costs reached 5.29% on Wednesday, their highest level since 2008, as a days-long sell-off of government bonds has pressured yields across markets. Prime Minister Andy Burnham told parliament that decisions would be grounded in fiscal responsibility, even as analysts warned the rising rates could erode half of the £24 billion fiscal headroom Rachel Reeves built up against Labour’s fiscal rules.
Market pressure mounts
The bond rout has coincided with global concerns about rising inflation, swelling deficits and competition for capital from tech-driven spending. Oil costs have risen following a resumption of Middle East conflict. The US 10-year Treasury yielded 4.75% at the close of 31 August.
Burnham sought to reassure investors on Wednesday, promising to stick to the fiscal rules while helping reduce cost-of-living pressure. The government reaffirmed a planned 3% defence spending increase. Kemi Badenoch, the opposition leader, attacked Burnham for refusing no spending requests, saying a prime minister must be a leader, not a people pleaser.
Fiscal pressures tighten
Helen Miller, director of the Institute for Fiscal Studies, noted that debt interest now accounts for one in every £12 the government spends. Even small rate moves add up quickly, she said, and when combined, multiple pressures create real strain on public finances.
The Office for Budget Responsibility bases its bond yield projections on market snapshots taken weeks before each budget. Ruth Curtice of the Resolution Foundation said markets will test whether the government is prepared to take politically unpopular steps to address fiscal challenges. A Treasury source countered that the UK, unlike other major economies, has a deficit-reduction plan and should distinguish itself positively as investors scrutinise fiscal approaches.
