The pound has fallen to its lowest level in nine months, driven by a rise in UK government borrowing costs. The 10-year borrowing rate surged to its highest point since the 2008 financial crisis when bank lending nearly stopped altogether.
Economists have raised concerns that these escalating costs could force the government to implement higher taxes or reduce its spending plans in order to meet its self-imposed borrowing targets. A spokesperson for the Treasury stated, “No one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances.” The spokesperson further emphasized that the Chancellor would “leave no stone unturned in her determination to deliver economic growth and fight for working people.”
The BBC reached out to the Treasury for comment, but the government has refrained from offering specifics until the independent forecaster’s official borrowing forecast in March. “I’m obviously not going to get ahead… it’s up to the OBR (Office for Budget Responsibility) to make their forecasts,” said a government spokesperson. “Having stability in the public finances is precursor to having economic stability and economic growth,” the Prime Minister’s official spokesperson added.
The Shadow Chancellor, Mel Stride, criticized the Chancellor’s spending and borrowing plans from the Budget, arguing they were “making it more expensive for the government to borrow.” He added in a post on X, “We should be building a more resilient economy, not raising taxes to pay for fiscal incompetence.”
The warning follows a spike in borrowing costs, with the 30-year borrowing rate reaching its highest level in 27 years. In the foreign exchange market, the pound weakened by up to 1.1%, dropping to $1.233 against the dollar—its lowest since April last year.
The UK government’s borrowing practices involve selling bonds to investors in order to fund its spending, which must be repaid with interest. Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments, warned that the rise in borrowing costs “has effectively eviscerated Reeves’ fiscal headroom, threatening to derail Labour’s investment promises and potentially necessitate a painful re-calibration of spending plans.”
On a global scale, rising government borrowing costs have been triggered by concerns over U.S. fiscal policies. Investor fears about President-elect Donald Trump’s tariff proposals, which could drive up inflation, have added to existing worries about growing U.S. debt. In the U.S., 10-year government bond interest rates surged to over 4.7% before settling slightly lower, marking their highest level since April. These shifts in the U.S. bond market have reverberated internationally, impacting the UK as well.
