Long-Term Borrowings in UK Reach Highest Level Since 1998

January 8, 2025 TruthUSA

High interest costs could hinder the government’s spending capacity, making it challenging to balance short-term needs with long-term objectives.

The UK is currently facing record-high borrowing costs since 1998, with the interest rate on 30-year government bonds rising to 5.22 percent on Tuesday.

UK government bonds, or gilts, are purchased by financial institutions in the UK and around the world.

Investors receive regular interest payments, known as yield, for lending money to the government for the bond’s duration, which can range from one month to 30 years.

The current yield is higher than after Liz Truss’s mini-budget that led to a market meltdown due to tax cuts and unfunded spending.

During that time, the interest rate on 30-year government bonds increased to 4.8 percent, still below the current 5.22 percent.

A rise in borrowing costs increases pressure on the government and the Treasury’s capacity for increased public spending.

Higher interest expenses could limit the government’s financial flexibility, intensifying the trade-offs between immediate requirements and long-term security.

October’s Budget included a £70 billion rise in public spending, financed through tax increases and heightened borrowing.

In November, Chancellor Rachel Reeves stated that UK public finances were on a stable path.

“We have more financial room than the previous government provided us, and that’s crucial,” she remarked.

However, shadow chancellor Mel Stride argued that the highest gilt yield in 27 years was proof of Labour-driving the economy into turmoil.

“They negatively spoke about it. They heavily taxed it. They raised borrowing. They hindered growth. Now we’re all bearing the consequences with heightened inflation, reduced employment, and lower wages,” he shared on social media platform X.

The Budget received varied responses from credit rating agencies S&P and Moody’s.

S&P indicated that increased public service spending could “encourage a more business-friendly atmosphere,” contingent on efficient fund allocation.

Moody’s expressed concerns over Reeves’s proposal to modify fiscal regulations to enable more borrowing, labelling it as “an additional hurdle amid challenging fiscal consolidation prospects.”

Global Market and Domestic Debt Challenges

The surge in long-term borrowing expenses occurs alongside escalating national debt—the total government debt accumulated over time—and expectations of fewer rate reductions by the Bank of England (BoE).

According to the OBR, interest rates are anticipated to remain elevated longer than previously projected.

For 2025, rates are forecasted 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 surpass the BoE’s 2 percent target until 2029.

The UK’s pensions sector, funded by gilts, poses another challenge to government debt.

Pension funds, along with insurers, possess around 25 percent of outstanding gilts. As government bond yields rise, major asset managers show interest in gilts.

In recent months, global government bonds have witnessed broad sell-offs, fueled by concerns that proposed policies by the incoming US Trump administration, like potential tariffs, could trigger inflation in various international economies.

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

The DMO additionally issued an added £4.25 billion in bonds on Wednesday.

Meanwhile, the BoE intends to downsize its balance sheet next week by selling some securities as part of its ongoing quantitative tightening strategy.

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

PA Media contributed to this report.

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