UK Borrowing Costs Reach 28‑Year High Ahead of Budget

Long‑term government borrowing costs have risen to a 28‑year high, adding pressure on Prime Minister Rishi Sunak before his first Budget on 28 October. The yield on a 30‑year gilt – a loan to the British government – rose to 5.89 % on 12 September, the highest level since 1998. Borrowing costs in the United States, Japan and Europe have also reached similar highs in recent days, reflecting investors’ concerns about inflation, state borrowing levels and large technology companies’ spending on artificial intelligence.

Sunak told the House of Commons that his government’s “bedrock”, as it seeks to tackle the cost‑of‑living crisis, would be “fiscal responsibility”. All of those factors will make the Budget process trickier for Sunak, who on 12 September addressed MPs for the first time as prime minister, together with his Chancellor, Jeremy Hunt.

Sunak said the economy and the cost of living were “the biggest issues facing the country”. Higher borrowing costs will reduce the amount of headroom the government has against its self‑imposed fiscal rules, limiting the amount that Hunt can spend on consumer‑friendly measures to ease the cost of living. Despite the squeezed public finances, Sunak said he would bring about “more substantial change” to ease living costs. “Britain is not where any of us would wish it to be,” he added.

Conservative leader Kemi Badenoch accused Sunak of “living in the past”. “His diagnosis is completely wrong. His theory of growth is completely wrong. He thinks that if government spends more money, we will all get richer. That is not how this works,” she told the House.

The chancellor has previously said he will stick to a set of fiscal rules imposed by his predecessor, Rachel Reeves, that restrict borrowing. These rules are designed to give markets clarity about the borrowing path. The more that is forecast to be spent on interest payments, the more likely it is that there will be a squeeze on spending or some form of tax rise to meet these rules.

On top of that, higher government rates can feed through to higher business and household borrowing costs, and so weigh on the economy. Sunak was already facing a tough balancing act with taxing and spending, due to pressures on defence and the cost of living.

Lord Jim O’Neill, a former economic adviser to Sunak, told BBC News that high government borrowing costs would force Labour to “get real” about “dealing with the triple lock” on the state pension, and “excessive” welfare spending. O’Neill, who recently declined a formal position in the prime minister’s team, said that current market pressure would force changes over “some of the things that no political figures ever seem to want to deal with”.

As well as the rise in 30‑year gilt yields, the yield on the benchmark 10‑year gilt rose to 5.22 % on 12 September, its highest rate since 15 June 2008, at the height of the global financial crisis. Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise.

Around the world, markets warn of rising government debt. Global markets reacted in particular after suggestions in the United States that its central bank could raise rates. Japan is also facing pressure to raise rates.

The chancellor is in the United States attending a meeting of global finance ministers and central bankers. He told the G20 that the UK had the fastest growth in the G7 in 2026 so far, that productivity was improving, and that the UK was cutting its borrowing at the fastest rate of the major economies.

US borrowing costs hit a fresh high on 12 September as renewed strikes in the Middle East pushed up oil prices and heightened concerns over inflation.

Karen Ward, JPMorgan’s chief market strategist for Europe, said governments around the world want to increase spending and are turning to borrowing to fund it. And she told BBC’s World at One that they were increasingly having to compete with major technology companies raising money to invest in the AI revolution, pushing up the amount of interest being charged.

“Markets are getting a lot more choice about who they are going to lend to and at what interest rates,” she added.

Sunak has rolled out a series of interventions to support consumers and businesses since entering Downing Street, and is expected to prioritise further measures to ease the cost of living in the Budget on 28 October.

Ward urged Sunak and Hunt to set out how they will fund any fresh spending on defence and the cost of living, and how those lending the government money will be paid back.

Kathleen Brooks, research director at investment company XTB, told the BBC News Channel:

“Of course, this is red lights flashing.”

“We are used to pockets of volatility, it has been volatile few months,” she said. “Record levels of government debt and a record tax take mean ‘these are not comfortable times for the new government and the new chancellor’, she added.

Every time bond yields rise, the UK has to pay more on the debt interest, Brooks said.

The rise in gilt yields means the government will pay more to borrow money. This extra cost will reduce the amount of money that can be spent on things like tax cuts, pensions, or new programmes. It also means that the government may need to raise taxes or cut spending elsewhere to keep its borrowing within the limits set by the fiscal rules.

Sunak has promised to keep the country on a path of fiscal responsibility, but the higher borrowing costs make it harder to do so while still helping people who are struggling with the cost of living. The Budget will therefore need to balance the need for support with the need to keep the national debt under control.

The government’s plan to cut borrowing at the fastest rate of the G7 is a key point in the Budget. If the UK can keep borrowing costs low, it will have more room to spend on the things that matter to voters. If borrowing costs stay high, the government will have to make tough choices.

The next few weeks will see the government present its Budget on 28 October. Investors will watch closely to see how the government plans to manage the higher borrowing costs while still delivering on its promises to reduce the cost of living. The outcome will shape the UK’s economic future for the next few years.

The rise in borrowing costs is part of a global trend. In the United States, Japan and Europe, governments are also facing higher interest rates. The global economy is still dealing with the after‑effects of the pandemic, high inflation, and the rapid growth of technology spending. These factors all push up the cost of borrowing for governments and businesses alike.

In the end, the Budget will need to show how the government can keep the country on a path of fiscal responsibility while still helping people who are feeling the pinch of higher prices. The way it balances these competing demands will be a key test for Sunak and his team.