Britain’s long-term borrowing costs have surged to their highest level since 1998, fuelling fears that Chancellor Rachel Reeves is losing control of the nation’s finances.
The yield on 30-year UK gilts climbed as much as nine basis points to 5.63pc on Tuesday, the steepest daily jump among major global economies.
Analysts warned the UK was now paying a so-called “moron premium” on its debt, a sign of fragile market confidence.
The spike comes just weeks before Ms Reeves is due to deliver her autumn Budget. Economists are predicting a fiscal black hole of up to £50bn, which many expect will trigger major tax rises.
Shadow chancellor Mel Stride said: “This is what happens when you spend and borrow like there’s no tomorrow.”
The Chancellor is also under political strain after Keir Starmer was forced to back down on welfare reforms following a rebellion from Labour MPs. At the same time, concerns are growing that the Office for Budget Responsibility will cut its UK growth forecast, reducing Ms Reeves’s room for manoeuvre even further.
Rupert Harrison, senior adviser at Pimco and former chief of staff to George Osborne, said the market’s faith in the Government’s spending plans was “very low” and that tax rises were widely expected.
He warned: “When we have had stories that she’s looking at revising the fiscal rules, that’s not something that markets like. I think the Treasury do understand that now. The market also doesn’t seem to like endless speculation about what different tax rises could be. Some of this is clearly adding to the nervousness in markets.”
Economist Mohit Kumar at Jefferies told The Telegraph there was now “a negative view on the UK fiscal picture”, adding: “Our view is that growth is going to be weaker than forecast, which further deteriorates the fiscal picture. We are reaching a stage where further tax rises will be counterproductive and measures to cut spending haven’t had much success so far.”
Simon French, chief UK economist at Panmure Liberum, pointed to the growing perception of a UK “moron premium” on gilt yields and said the bond market’s warnings should not be ignored.
He said: “The warnings from the bond market are getting more significant and therefore more attention should be paid to avoiding bad outcomes. Markets want politicians to be pragmatists, not ideologues. And the facts have fundamentally changed in terms of debt sustainability. I think the Chancellor gets it. The problem is that the rest of her party doesn’t.”
Ms Reeves has recently reshuffled her economic team, handing pensions minister Torsten Bell responsibility for shaping policy ahead of the Budget.
But forecasts suggest she will still need to find between £17bn and £27bn to meet her own fiscal rules, a gap Capital Economics predicts will be filled largely by tax rises.
Britain’s debt interest costs are already the highest in the G7, with Reeves forced back in March to claw back £9.9bn of fiscal headroom in order to stay within borrowing targets.
With borrowing costs surging and fiscal credibility in question, Britain’s Chancellor faces a daunting autumn reckoning.
