The pressure on borrowing costs may be easing for chancellor Rachel Reeves and the UK government, with the premium on gilt yields showing signs of unwinding. But it’s contingent on markets staying calm, say researchers.
Ten-, 20- and 30-year gilt yields have all fallen sharply in recent months, an Institute for Public Policy Research (IPPR) analysis has shown, removing some pressure on the public purse. UK borrowing costs had increased by 0.4 to 0.8 percentage points more than major peers since the 2024 election.
The government had faced uniquely high borrowing costs, compared to its peers. UK yields had increased by 40-80 basis points more than its competitors since the election, costing the Exchequer between £2bn-£7bn a year, the IPPR said.
At its peak, government borrowing costs were six times more expensive than pre-pandemic, and 30-year borrowing costs had risen by 4.1 percentage points since 2022 – 150 basis points more than the US and 100 basis points more than the Eurozone.
However, 10-, 20- and 30-year borrowing costs have fallen by 20 basis points more than comparative countries since Rachel Reeves’ speech at Labour party conference, highlighting that the UK premium may finally be coming to an end.
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The reasons for this premium are not straightforward, especially given that the UK’s economic fundamentals are stronger than those of many countries with lower borrowing costs.
The UK’s debt-to-GDP ratio is 101%, compared with 122% in the US and 237% in Japan, and the government is planning to halve the amount it borrows each year by the end of this parliament.
High borrowing costs come down to factors such as uncertainty about the future of fiscal policy, quantitative tightening measures by the Bank of England and a shifting reliance on foreign investors to buy bonds – as opposed to relying on defined benefit pension schemes, the research found.
But smart policy decisions could steady the ship when it comes to debt, the IPPR argued.
“With clear, credible fiscal plans, the UK could be a star performer in the G7 – and simply reassuring markets that we’ll stick to those plans could save billions,” said Carsten Jung, associate director for economic policy at IPPR.
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The UK is on track to spend £92bn on interest payments on its debt this year – about 7.5% of government receipts. The authors of the IPPR report say that continuing to assure markets could save the Exchequer billions of pounds in reduced borrowing costs.