UK Long-Term Borrowing at Record High Since 1998

UK £5, £10, £20, and £50 notes with £1 coins, shown in a file photo dated Jan. 26, 2018. Dominic Lipinski/PA

The UK’s cost of borrowing is at a record high since 1998, as the interest rate on 30-year government bonds hit 5.22 percent on Tuesday.

UK government bonds, known as gilts, are bought by financial institutions in the UK and globally.

Investors are promised regular interest payments, or yield, in return for lending the government their money over the bond’s lifetime. This can include periods from one month to 30 years.

The yield is now higher than in the aftermath of former Prime Minister Liz Truss’s mini-budget which announced tax cuts and unfunded spending, causing a market meltdown.

At the time the interest rate on 30-year government bonds increased to 4.8 percent, which is still lower than the current 5.22 percent figure.

The hike in the cost of borrowing ramps up the pressure on the government and the Treasury’s headroom for increased public spending.

Higher interest costs may constrain the government’s fiscal flexibility, making the trade-offs between short-term demands and long-term stability more pronounced.

The October Budget measures included a £70 billion increase in public spending, funded through tax rises and increased borrowing.

In November, Chancellor Rachel Reeves said that UK public finances were “on a stable and solid trajectory.”

“We have more headroom than the previous government left us, and that is important,” she said.

However, shadow chancellor Mel Stride has suggested that the highest gilt yield in 27 years was “yet more evidence Labour have driven our economy into a ditch.”

“They talked it down. They taxed the life out of it. They’ve racked up borrowing. They killed growth. Now we are all paying the price with higher inflation, fewer jobs and lower wages,” he wrote on social media platform X.

The Budget garnered mixed reactions from credit rating agencies S&P and Moody’s.

S&P noted that increased public service spending could “foster a more business-friendly environment,” adding that the potential benefits would hinge on whether the funds are utilised effectively.

Moody’s also expressed concern over Reeves’s proposal to amend fiscal rules to permit increased borrowing, describing it as “an additional challenge for what are already tough fiscal consolidation prospects.”

Global Market and Domestic Debt Challenges

The increase in long-term borrowing cost comes amid ballooning national debt—the cumulative amount owed by the government over time—and expectations of fewer rate cuts by the Bank of England (BoE).

In its October 2024 Economic and Fiscal Outlook, the Office for Budget Responsibility (OBR) highlighted the ongoing uncertainty surrounding the monetary policy outlook.

According to the OBR, interest rates are likely to stay higher for longer than previously forecast.

For 2025, rates are projected to range between 3.6 and 4.7 percent, with daily five-year gilt spot yields fluctuating between 3.5 and 4.2 percent, since the March forecast.

The forecaster also estimated that inflation—currently at 2.6 percent—will stay above the BoE’s target of 2 percent until 2029.

Britain’s pensions industry, funded by gilts, is posing another challenge to government debt.

Pension funds, along with their insurers, hold around a quarter of outstanding gilts. As the yields on government bonds increase, big asset managers turn positive on gilts.

In recent months, government bonds have experienced a broad sell-off globally, driven by concerns that policies proposed by the incoming Trump administration in the United States, such as potential tariffs, could trigger inflation in several international economies.

On Tuesday, the UK’s Debt Management Office (DMO) issued £2.25 billion in 30-year bonds at a yield of 5.19 percent.

The DMO also issued an additional £4.25 billion in bonds on Wednesday.

Meanwhile, the BoE is set to reduce its balance sheet next week by selling off some of its securities as part of its ongoing quantitative tightening strategy.

For the 2024/2025 fiscal year, the DMO projected bond issuance to total approximately £296.9 billion.

PA Media contributed to this report.