Long-term government borrowing costs have risen to a 28-year high, putting further pressure on Prime Minister Andy Burnham ahead of his first Budget next month.
The yield on a 30-year gilt — a loan to the British government — rose to 5.89% on Tuesday, the highest since 1998.
Borrowing costs in the US, Japan and Europe have hit similar highs in recent days, reflecting investors’ concerns about inflation, state borrowing levels and spending levels by large tech companies on AI.
Burnham told the House of Commons his government’s “bedrock”, as it seeks to tackle the cost-of-living crisis, would be “fiscal responsibility”.
All of those factors will make the Budget process trickier for Burnham, who on Tuesday addressed MPs for the first time as prime minister, and his Chancellor, John Healey.
Burnham told the House of Commons the economy and the cost of living were “the biggest issues facing the country”.
Higher borrowing costs will reduce the amount of headroom the government has against its self-imposed fiscal rules, limiting the amount Healey can spend on consumer-friendly measures to ease the cost of living.
Despite the squeezed public finances, Burnham said he would bring about “more substantial change” to ease living costs.
“Britain is not where any of us would wish it to be,” he added.
Conservative leader Kemi Badenoch accused Burnham of “living in the past”.
“His diagnosis is completely wrong,” she told the House of Commons. “His theory of growth is completely wrong. He thinks that if Government spends more money, we will all get richer.
“That is not how this works.”
The chancellor has previously said he will stick to a set of fiscal rules imposed by his predecessor, Rachel Reeves, that restrict borrowing. These rules are designed to help markets have clarity about the path of borrowing.
The more that is forecast to be spent on interest payments, the more likely that there will be a squeeze on spending or some form of tax rise to meet these rules.
On top of that, higher government rates can feed through to higher business and household borrowing costs, and so weigh on the economy.
The prime minister was already facing a tough balancing act with taxing and spending, due to pressures on defence and the cost of living.
Burnham’s ex-economic adviser Lord Jim O’Neill told BBC News that high government borrowing costs would force Labour to “get real” about “dealing with the triple lock” on the state pension, and “excessive” welfare spending.
Lord O’Neill, who recently turned down the offer of a formal position in the prime minister’s team, said that current market pressure would force changes over “some of the things that no political figures ever seem to want to deal with”.
As well as the rise to 30-year gilt yields, the yield on the benchmark 10-year gilt rose to 5.22% on Tuesday. This is its highest rate since June 2008, at the height of the global financial crisis.
Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise.
