The interest rate paid on long term government debts have reached 6% amid a global bond sell-off – with possible implications for Labour’s spending plans and public services
Government borrowing costs have hit a near 30-year high – sending “alarm bells ringing” for Chancellor John Healey ahead of this month’s Budget, experts have warned.
The UK has been caught up in a worldwide sell-off of government bonds, with investors spooked by the risk of higher inflation, slower economic growth, and interest rate hikes .
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Governments help fund their spending needs by selling bonds, a type of IOU, which in the UK’s case are known as gilts.
The interest rate – or yield- on 30 year gilts has reached above 6%, the highest since 1998. The yield on shorter term 10 -year gilts has climbed to around 5.49%.
The rise risks holding back the government’s spending plans because it has to shell out even more on interest payments, leaving less to spend on public services.
Those payments are already on track to top £100billion this year, or more than what is spend by the defence, justice and home office departments. The overall national debt is close to £3trillion.
Higher borrowing costs also make life harder for the Chancellor ahead of the Budget on October 28, increasing the risk of tax hikes and spending cuts.
Russ Mould, investment director at broker AJ Bell, said: “The 30-year gilt passed above 6% for the first time since January 1998, sending alarm bells ringing.
“Prime Minister Andy Burnham and Chancellor John Healey already have enough on their plate without a rapid increase in government borrowing costs since they took office.
“Gilt yields moving at such a pace presents a major challenge for their spending and borrowing plans.”
Axel Rudolph, chief technical analyst at investing and trading platform IG, said: “UK borrowing costs are becoming an increasingly difficult problem for Chancellor John Healey.
“Higher yields mean the government has to pay more to finance its debt, putting further pressure on the public finances and making it harder to balance spending commitments with the need to keep borrowing under control.
“Even the recent fall in oil prices hasn’t provided any lasting relief for bond markets. With yields still rising, the Chancellor faces an increasingly narrow path as he prepares to set out his plans for the economy.”
Susannah Streeter, chief investment strategist at the Wealth Club, said: “The bond market is adding to the pressure cooker ahead of the UK Budget, with the 10-year gilt yield climbing to around 5.49%, the highest level since July 2007.
“The warning lights are flashing in a week when the government paid the highest yield on a 10-year gilt auction since 1999, underlining how much more expensive it is becoming to borrow.
“With debt already high and interest payments eating up a hefty chunk of public finances, sustained yields at these levels could further squeeze the Chancellor’s wiggle room when he sets out his spending plans.”