A leading think tank believes the extra cost the UK faces when borrowing, compared with other major economies, may finally be easing as market confidence improves. The Institute for Public Policy Research (IPPR) said the chancellor, Rachel Reeves, helped reassure investors in the Autumn Budget by increasing the Government’s financial headroom from £9.9bn to £22bn by 2030.
Government bond yields have risen globally in recent years due to higher inflation, rising interest rates and expanding deficits. However, UK gilt yields have climbed more sharply than those in the US and eurozone. According to IPPR, this reflects a lingering credibility problem, with traders questioning whether the UK will stick to its fiscal plans. Since the 2024 election, UK yields have increased by between 0.4 and 0.8 percentage points more than major peers, resulting in an additional £7bn per year in borrowing costs. The Government has already spent £92bn on interest payments this financial year.
This premium persists despite the UK’s relatively favourable fundamentals. The country’s debt stands at 10% of GDP, well below the US at 122% and Japan at 237%, and ministers intend to halve annual borrowing by the end of the parliament.
IPPR argues that recent Budget measures have begun to rebuild trust, with the UK’s premium against eurozone borrowing nearly halving. It also urged the Bank of England to pause its rapid sales of Government bonds, warning that the current policy is putting unnecessary pressure on gilt markets.
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