The government is “on track” to miss its own budget borrowing targets, some economists say after interest rates on the UK’s long-term borrowing hit their highest levels in the century.
The official forecaster, the Office for Budget Responsibility, will begin the process of updating its forecasts next month, which will be presented to Parliament at the end of March.
The rising cost of borrowing means that “there is a good chance that the OBR will judge that the chancellor, Rachel Reeves, is about to miss her main fiscal rule”, according to Ruth Gregory of Capital Economics.
National debt service is currently expected to be 7% of total government spending, but this forecast was based on lower government borrowing rates.
Number 10 said there was “no doubt about the government’s commitment to economic stability” and “compliance with our fiscal rules is non-negotiable”, saying only forecasts of The OBR constitutes a precise estimate of the government’s room for maneuver.
The government’s clear indication is that although it will not present a new budget in March, any necessary adjustments will have to come in the form of further spending cuts.
This morning an auction of £2 billion of 30-year UK government debt was sold at an effective interest rate of 5.18%.
The Debt Management Office, part of the Treasury, has actually paid the highest interest rates for these very long-term loans since 1998.
Markets are questioning debts around the world, and in particular the level of bond issuance from countries like the UK and the US, as well as the likelihood of persistent inflation, above the objective.
Such debt over thirty years has no direct impact on the borrowing rates of households and businesses. This type of debt is rather a specialized instrument used by pension funds. But today’s auction highlights a slight rise in borrowing rates over the past month.
For example, broader developments in the government bond market have not yet significantly changed fixed mortgage rates. But if this continues, as is plausible, for about a month, it will have an impact on the Office for Budget Responsibility’s new forecasts.
The rise in rates affected the United States and the United Kingdom more, and continental Europe less. The post-budget rise in UK market rates initially eased in early December. But now UK borrowing rates are rising alongside those in the US.
Stagnating growth and persistent inflation have sparked concerns about so-called “stagflation.” Markets are starting to question the inflationary impacts of new President Trump’s trade and tax policies.
Although it is not a crisis, it is a new reality. Markets are questioning whether the UK can actually sustain higher growth and controlled inflation. And these questions now arise against the backdrop of Trump’s trade tumult affecting global borrowing markets. It’s a rocky start to 2025.
