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The UK government is under renewed financial strain after long-term borrowing costs rose to their highest point in a generation. The yield on 30-year government bonds (gilts) has climbed to 5.72% – a level not seen since 1998.
For the government, this makes borrowing significantly more expensive and increases the pressure on Chancellor Rachel Reeves to find additional revenue through taxation ahead of the Budget later this year.
For businesses, tighter public finances could directly influence future tax and spending choices.
Why borrowing costs matter
Governments raise money by issuing bonds to investors, committing to repay the amount in future with interest. The yield on those bonds – essentially the rate of interest – has been moving upwards for months. Higher yields mean more of the government’s budget is absorbed by debt repayments, leaving less available for services or investment.
Rachel Reeves has committed to two fiscal rules which she describes as “non-negotiable”:
• By 2029–30, everyday government expenditure must be met entirely by tax revenues rather than borrowing.
• By the same year, government debt must be on a downward path as a proportion of national income.
The difficulty is that her margin of flexibility – the safety net built into her plans – is relatively narrow at about £10bn.
Why are borrowing costs rising?
The UK is not alone in this situation. Bond yields have also been increasing in Germany, France, the Netherlands and the US. A combination of factors appears to be behind this shift.
The World Trade Organisation has highlighted that the global economy is experiencing the biggest disruption to trade rules in 80 years, with the consequences of US tariffs likely to intensify next year.
At the same time, there are signs that some investors are selling UK government debt due to doubts about the government’s fiscal approach. This forces the Treasury to offer higher yields to attract buyers.
What this means for the Autumn Budget
One economist has suggested that Reeves may need to raise between £18bn and £28bn in additional revenue at the Budget to comply with her fiscal rules. This raises the prospect of tax increases.
The government has, however, restated its manifesto promise not to raise income tax, VAT, or national insurance for “working people.” If this position is maintained, it reduces the available options for raising revenue, though some possibilities being discussed include:
• Extending the freeze on income tax thresholds – often called a “stealth tax”, this gradually moves more earners into higher tax brackets as wages rise.
• Reforming property taxes and stamp duty.
• Introducing National Insurance contributions for landlords.
At this stage these remain speculative, but they suggest the Autumn Budget could be particularly testing. For the Chancellor, the task will be to balance the fiscal rules with the need to maintain market and business confidence.
Implications for businesses
While rising gilt yields may sound remote, the impact could filter through quickly to the business environment:
• Possible tax measures – changes to increase revenue could be introduced.
• Financing pressures – higher government borrowing costs often push up borrowing costs across the wider economy, including for business loans and investment.
• Ongoing uncertainty – until the Budget is announced, planning for tax or cost increases will be more difficult.
Looking ahead
For now, business owners may find it sensible to take a cautious approach. This could include stress-testing finances to understand the impact of potential tax increases or higher borrowing costs.
The forthcoming Budget will set the tone for government spending and taxation, and in turn, for the business landscape. With higher borrowing costs reducing the Chancellor’s room for manoeuvre, decisions taken this autumn are likely to have a direct effect on companies across the UK.
We will continue to update you as Budget announcements unfold. In the meantime, if you would like support in assessing how your business might be affected, please get in touch – we would be glad to help.
