Economists have warned that the government is “on course” to miss its own Budget borrowing targets after interest rates for UK long-term borrowing rose to their highest levels this century.
The official forecaster, the Office for Budget Responsibility will start the process of updating its forecast next month, to be presented to parliament in late March.
The rising cost of borrowing means, “there is a significant chance that the OBR will judge that the Chancellor, Rachel Reeves, is on course to miss her main fiscal rule” according to Ruth Gregory from Capital Economics.
Servicing the national debt is currently forecast to take up 7% of total public spending, but that forecast was based on lower government borrowing rates.
Number 10 said there was “no doubt about the government’s commitment to economic stability” and “meeting our fiscal rules is non-negotiable” saying that only the OBR’s forecast is an accurate predication of the government’s room for manoeuvre.
The clear indication from the government is that although they will not hold another Budget in March, any necessary adjustment would have to come in terms of some new spending cuts.
This morning, a £2bn auction of 30 year UK government debt, sold at an effective interest rate of 5.18%.
The Debt Management Office, a part of Treasury, effectively paid the highest interest rates for these very long term loans since 1998.
The markets are raising their eyebrows about debts around the world, and in particular, the level of issuance of bonds from countries such as the UK and the US, and additionally, the likelihood of sticky, above target inflation.
Thirty-year debt such as this does not have a direct pass through into borrowing rates for households and companies. This type of debt is more of a specialist instrument used by pension funds. But today’s auction shines a light on an uptick of borrowing rates over the past month.
The more general gilt market move, has not yet significantly changed fixed mortgage rates, for example. But if it continues, as is plausible, for the next month or so, it will impact the Office for Budget Responsibility’s new forecast.
The rise in rates has affected the US and the UK more, and less so continental Europe. The tick-up in UK market rates after the Budget, initially faded by early December. But now British borrowing rates are moving up alongside US ones.
Stagnant growth and sticky inflation have raised concerns about so-called “stagflation”. Markets are starting to question the inflationary impacts of incoming President Trump’s trade and tax policies.
So while this is not a crisis, it is a new reality. Markets are questioning if the UK really can sustain higher growth and restrained inflation. And those questions are now occurring against the backdrop of the Trump trade tumult affecting global markets for borrowing. It’s a bumpy start to 2025.