The cost of UK government borrowing has surged to levels not seen in nearly three decades, intensifying pressure on Chancellor Rachel Reeves to explain how she intends to address the widening deficit in public finances ahead of the autumn budget.

The yield on the UK’s 30-year bond climbed eight basis points on Tuesday, reaching 5.62%. That figure brings borrowing costs dangerously close to the April spike of 5.66%, when yields touched their highest since 1998.

This sharp increase means the annual cost of financing government debt now exceeds £100bn, almost 10% of the entire budget. Economists warn that the UK faces a particularly fragile financial position at a time when many advanced economies are contending with rising healthcare expenses, welfare costs, and the financial impact of ageing populations.

Reeves is expected to confront a shortfall between £20bn and £40bn when presenting her autumn budget. In order to maintain her fiscal rules and safeguard the £10bn buffer set by current plans, she will need to identify between £30bn and £50bn in new revenue, spending reductions, or further borrowing.

Higher borrowing costs, combined with policy reversals on welfare, have only strengthened expectations of tax rises later this year. Investors are also concerned about inflation, with fears that it could remain elevated for years, eroding the value of their investments in UK assets.

Catherine Mann, a member of the Bank of England’s rate-setting committee, cautioned against underestimating the scale of the challenge. She said policymakers were failing to fully grasp “inflation persistence.” According to Mann: “There is an increasing tension between inflation persistence and weak growth, the trade-off that we currently face in the United Kingdom.”

She urged that interest rates remain high until inflation is brought under control, after which they could be cut sharply to stimulate growth.

Economists Warn Of Stagnant Productivity

Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser to Allianz, argued that the UK’s economic difficulties stem from a lack of resilience.

“For example, it lacks the highly dynamic and innovative private sector that the US has and, compared to France, has fewer external safety nets, such as the [vast resources of the] European Central Bank.
“Over the past 15 years, productivity growth has averaged a quarter of the annual average of prior decades. This has created a long-term drag on growth, and its continued absence will put even greater immediate and longer-term structural pressures on the economy.”
Mohamed El-Erian

Jagjit Chadha, an economics professor at the University of Cambridge, described the situation as “dire” and urged Reeves to “get a grip” on the nation’s finances. He warned that the UK’s vulnerable fiscal position could leave it seeking a bailout from the International Monetary Fund if a global economic shock struck.

The Treasury plans to auction about £300bn of debt this financial year, with a Debt Management Office auction scheduled to raise £5bn on Wednesday.

Charlie Bean, a former Bank of England deputy governor, acknowledged the strain but cautioned against alarmist predictions. “The fiscal position is not good, though talk of a £50bn hole and the imminent need for an IMF bailout is over the top,” he said.

He argued that Reeves had made life harder for herself by ruling out increases in the main tax rates and committing to a slender £10bn buffer. Bean also criticised Labour backbenchers for limiting options on spending cuts.

Back in 2022, before Liz Truss became prime minister, the yield on 30-year bonds hovered around 2.4%. The mini-budget under Truss and then-chancellor Kwasi Kwarteng sent yields soaring to 5%, before retreating to 3.5% when many of the proposals were rolled back.

By Labour’s election victory last July, yields were already above 4.5%. They have since continued their climb, staying above 5% since January and now pressing toward fresh highs not seen since the late 1990s.