UK borrowing costs near 30-year high ahead of budget

The government is paying more to borrow through newly issued debt than at almost any point in the past three decades, a reminder of the tough fiscal backdrop against which prime minister Andy Burnham and chancellor John Healey are drawing up their first budget, now less than two months away.

The average yield on UK government bonds, or gilts, sold to investors so far this year is 3.8 per cent, according to analysis of figures published by the Debt Management Office, the body responsible for selling the government’s debt. That is not far short of levels last seen in 1998, when the average yield on newly issued debt exceeded 4 per cent.

Yields have held close to that near three-decade high for the past two years, the product of stubborn inflation, investor unease about persistently high public borrowing across the rich world, and hundreds of billions of pounds worth of gilt sales by the Bank of England as it unwinds the bond holdings built up under quantitative easing.

The rising cost of compensating the investors who buy that debt has heaped fresh pressure on the public finances. The Office for Budget Responsibility forecasts that debt interest spending will exceed £100 billion a year, the equivalent of the defence and Home Office budgets combined, until at least the 2030s.

Public borrowing has already overshot official forecasts this financial year, and economists have warned the pair that the headroom against the government’s main fiscal rule, which requires day-to-day spending to be funded by tax revenues, may have more than halved from £23.7 billion because of rising gilt yields and the higher energy prices that have followed the outbreak of war in the Middle East six months ago.

That likely erosion has fuelled speculation about tax rises or spending cuts at the budget on 28 October. Burnham said last week that he would not be “unrealistic” about the “challenging” state of the public finances, and refused to rule out tax increases.

Oil, inflation and the Bank

Britain has lived with persistently high inflation since Russia’s invasion of Ukraine in 2022, which forced the Bank of England to lift interest rates to a peak of 5.25 per cent. Bank Rate has since fallen to 3.75 per cent.

Markets began the year expecting several rate cuts in 2026. That calculation changed in February, when the US and Israel launched strikes against Iran. The conflict has left the Strait of Hormuz effectively closed for more than six months, sending oil and gas prices spiralling and keeping central banks cautious, and investors now think one or two rate rises could come before the end of the year.

James Smith, developed markets economist at ING, said: “This year it’s been all about oil. For all the talk about Burnham and what he means for the bond market, government borrowing costs have been driven almost singularly by energy prices and their perceived impact on the Bank of England.”

Tomasz Wieladek, chief European macro strategist at T Rowe Price, said: “The UK’s fiscal fundamentals aren’t bad relative to other countries. But the big difference is poor inflation performance. That is the true reason why gilt yields are higher than in other countries, as investors now require inflation compensation.”

Longer-dated debt has borne the brunt of investor nerves about the appetite of governments in rich economies to rein in borrowing, with 30-year bond yields touching multi-decade highs in August. Britain, however, remains on course to bring down its deficit at the fastest pace in the G7 in the coming years under plans set out by Healey’s predecessor, Rachel Reeves, and some analysts expect gilt yields to fall back before the budget.

The Treasury said: “The OBR will publish its updated forecast alongside the budget in October and we will not comment on rumour, speculation or proposals about its contents ahead of then.”

Amy Ingham

Amy Ingham is a reporter at Business Matters, covering UK business news with a focus on breaking news, business policy, late payments and insolvency. She joined the magazine in 2026 after completing the NCTJ Diploma in Journalism at Harlow College’s journalism school. Her recent reporting includes British Steel’s nationalisation and its impact on SME suppliers, the decline in late payments by large firms, and Insolvency Service director disqualifications. Reach her at aingham@cbmeg.co.uk.