UK’s higher borrowing costs compared with major countries ‘may be coming to an end’ | Government borrowing

The premium the United Kingdom pays to borrow money compared to its international counterparts may be diminishing as markets express growing confidence in the government’s financial plans, according to a recent analysis.

UK Borrowing Costs Ease as Fiscal Confidence Grows

The Institute for Public Policy Research (IPPR) reported that Chancellor Rachel Reeves’s announcement in the autumn budget to more than double the UK’s financial headroom by 2030 – from £9.9 billion to £22 billion – has begun to reassure bond markets regarding Labour’s fiscal approach.

Government bond yields, the return paid on government debt, have been increasing globally due to higher inflation, rising interest rates, and larger deficits. However, the UK’s gilt yields have been higher than those of peers like the US and the eurozone, largely attributed to a “credibility problem” concerning the achievement of its fiscal policies.

Since Labour’s victory in the 2024 election, UK yields have risen by 0.4 to 0.8 percentage points more than major peers, costing taxpayers up to £7 billion annually. The government has spent £92 billion on interest payments this financial year.

Despite the fundamentals of the UK economy being stronger than countries with lower borrowing costs – with a debt-to-GDP ratio of 101% compared to 122% in the US and 237% in Japan, and plans to halve annual borrowing by the end of this parliament – a lack of trust in fiscal policy has persisted.

The IPPR highlighted the 2022 mini-budget under the Liz Truss administration as a demonstration of how quickly a UK government could deviate from its fiscal framework. Successive chancellors had also “repeatedly changed, missed or redefined their own fiscal rules” or been replaced, with seven different chancellors serving from 2016 to 2024. This history has fostered a “lack of trust in stated fiscal policy.”

However, the autumn budget prompted the UK premium against the eurozone to almost halve. William Ellis, a senior economist at IPPR, stated, “The premium on UK borrowing costs appears to be easing, showing that markets are responding to growing confidence in the government’s fiscal approach. Sticking to its fiscal plans could save the exchequer billions and free up fiscal space in the future.”

The IPPR also suggested that the Bank of England pausing its sale of government bonds – currently being sold at a record pace – could further lower borrowing costs. Carsten Jung, the associate director for economic policy at IPPR, said, “The Bank of England needs to pull its weight. Actively selling government bonds is adding unnecessary pressure to the gilt market. It should stop – just as every other major central bank has.”