Taxpayer left with hefty bill from high UK borrowing costs – report
The IPPR said the ‘premium’ added to UK borrowing is finally easing back as financial markets have backed the Chancellor’s plans.
High government borrowing costs since Labour won the election have cost the taxpayer up to £7 billion amid concerns over the state of the UK’s finances, but this “premium” is showing signs of coming to an end, according to a report.
The Institute for Public Policy Research (IPPR) found the UK had seen “uniquely high” borrowing costs when compared to other advanced countries, with yields on government bonds – also known as gilts – having risen steadily since Labour came into power in the summer of 2024.
Yields on gilts, which move counter to the price of bonds, were up to 80 basis points higher than competitors since the election, costing the taxpayer between £2 billion and £7 billion a year, the IPPR said.
Repeated bouts of sell-offs had put gilts under pressure, it found, calculating that, at the peak, UK Government borrowing costs were six times more expensive than before the pandemic.
Former prime minister Liz Truss and her disastrous mini-budget saw gilts yields surge in September 2022 and they have come under renewed pressure over the past year as concerns over UK borrowing resurfaced.
At the recent high point, the yields on long-dated 30-year gilts had risen by 4.1 percentage points since 2022, which is 150 basis points more than the US and 100 basis points higher than for the eurozone, according to the IPPR.
The report said this was likely to have been driven by market doubts over the Government’s plans to bring down UK borrowing and whether they could be delivered.
The Bank of England also added further pressure to gilts with its programme to sell off its stock of government bonds at a faster pace than other central banks, the IPPR added.
But gilt yields have eased back in recent months – noticeably since the Chancellor’s pre-budget speech and falling further since the fiscal event on November 26, when she outlined a series of tax hikes and moves to repair the public finances.
Government borrowing is now forecast to halve over the course of this parliament.
William Ellis, senior economist at the IPPR, said: “The premium on UK borrowing costs appears to be easing, showing that markets are responding to growing confidence in the Government’s fiscal approach.”
With the UK on course to spend £92 billion on interest payments alone this year, the IPPR added that continuing declines in gilt yields could save the taxpayer “billions of pounds in reduced borrowing costs”.
Carsten Jung, associate director for economic policy at the IPPR, said: “With clear, credible fiscal plans, the UK could be a star performer in the G7 – and simply reassuring markets that we’ll stick to those plans could save billions.
“The Bank of England also 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.”
A Treasury spokesman said: ““As the Chancellor has said her fiscal rules are non-negotiable and will get borrowing down while supporting investment.
“Borrowing this year is set to be the lowest for six years as a share of GDP, we’re cutting borrowing more than any other G7 country, and we’ve doubled headroom on the stability rule to over £21.7 billion to drive costs down further.”
The Bank of England has been approached for comment.
