The UK government is facing a fresh financial squeeze after long-term borrowing costs climbed to their highest level in a generation. The yield on 30-year government bonds (known as gilts) has reached 5.72% – the highest since 1998.
For the government, this means it is now significantly more expensive to borrow money, adding pressure on Chancellor Rachel Reeves to increase taxes ahead of the Budget later this year.
For businesses, tighter government finances could shape tax and spending decisions over the coming months.
Why borrowing costs matter
Governments raise money by selling bonds to investors, promising to repay them in future with interest. The yield on those bonds – effectively the interest rate – has been rising for months. Higher yields mean the government must spend more just to service its debt, reducing the funds it has available for day-to-day spending or investment.
Rachel Reeves has set herself two “non-negotiable” fiscal rules:
- By 2029–30, all day-to-day government spending must be funded through tax income rather than borrowing.
- Government debt must be falling as a share of national income by the same year.
The challenge is that her buffer – the margin of safety built into her plans – is slim at around £10bn.
Why are costs going up?
The UK is not alone. Yields have been climbing in Germany, France, the Netherlands and the US. Several factors appear to be driving the change.
The World Trade Organisation has said the world is currently “experiencing the largest disruption to global trade rules” in 80 years, with the impacts from the US tariffs perhaps not likely to be fully felt until next year.
It also appears that investors may be selling off UK government debt due to concerns over the government's financial plans, and this increases the rates that need to be offered to attract investors.
What this means for the Autumn Budget
One economist has estimated that Reeves may need to find between £18bn and £28bn in extra revenue at the Budget to avoid breaking her own fiscal rules. That raises the likelihood of tax rises.
The government has so far stuck to its manifesto pledge not to raise income tax, VAT, or national insurance for “working people”. Assuming this continues, that limits the options available for raising taxes, but several possibilities are being speculated on. These include:
- Extending the freeze on income tax thresholds – this so-called “stealth tax” drags more people into higher tax bands as wages rise.
- Reforming property taxes and stamp duty.
- The introduction of National Insurance for landlords.
At this stage, these remain as speculation but they indicate that the Autumn Budget could be a challenging one. For the Chancellor, the challenge is not only meeting her fiscal rules but doing so in a way that maintains confidence in the UK economy.
What this could mean for your business
For business owners, the headlines about bond yields and borrowing costs might seem distant, but the consequences could well be felt over the coming weeks:
- Potential tax changes – measures could be introduced to raise revenue.
- Economic headwinds – higher borrowing costs for the government may translate into higher financing costs across the economy, including for businesses seeking loans or investment.
- Policy uncertainty – until the Budget is delivered, businesses may find it harder to plan for tax and cost pressures.
Looking ahead
For businesses, the best approach for the next few months may be to plan cautiously. For instance, it would be worth stress-testing your business finances to see how they would cope with possible tax rises or higher borrowing costs.
The Budget later this year will set the direction for government finances and, by extension, the business environment. Rising borrowing costs have narrowed the Chancellor's options, meaning that decisions in the autumn could well have direct consequences for businesses across the UK.
We will continue to keep you posted on the Budget news, but in the meantime, if you would like any help looking at how your business finances may be affected, please give us a call. We would be happy to help you!
See: https://www.bbc.co.uk/news/articles/cy989njnq2wo