The UK government’s cost of borrowing has just hit its highest level since 1998, turning up the heat on Chancellor Rachel Reeves ahead of her first big Budget later this year.
The yield – or interest rate – on 30-year government bonds rose to 5.7%, which means it’s now more expensive for the government to borrow money. On top of that, the pound also slid more than 1% against the US dollar, sinking to its weakest level in almost a month.
It’s not just the UK feeling the squeeze – borrowing costs are rising across Europe too, with Germany, France, and the Netherlands all seeing their long-term bond yields hit highs not seen since 2011. Global tensions, US trade policies under Donald Trump, and political uncertainty in France are all fuelling investor nerves.
Pressure on Reeves
For Reeves, this is more than just a market wobble. Investors appear nervous about the government’s ability to keep its finances in check – a warning sign she can’t ignore. As one analyst put it, she’s facing “highly difficult choices” in her autumn Budget.
Labour has promised not to raise income tax, VAT, or national insurance for “working people,” but that leaves Reeves with fewer options to raise cash. Speculation has been swirling all summer about possible moves – from extending the freeze on income tax thresholds (which quietly drags more people into higher tax bands) to overhauling property taxes.
The challenge is balancing the books without stifling growth. If higher taxes slow the economy, Reeves could find herself in a vicious cycle of weaker growth and higher borrowing.
Reeves’ fiscal rules
When she took office, Reeves set two clear fiscal rules:
- Everyday government spending must be funded through tax income, not borrowing, by 2029-30.
- Debt must start falling as a share of the economy by the end of this parliament.
The problem? Her financial cushion to stick to these rules is only about £10bn – not much room to manoeuvre if growth stalls or borrowing costs rise further.
Some economists reckon she’ll need to find **£18bn to £28bn** in tax rises or spending cuts to avoid breaking her own rules. That likely means households and banks could be the ones to shoulder higher taxes.
The political stakes
The opposition is already seizing on the situation. Conservative MP Mel Stride called the market moves “another economic disaster from Rachel Reeves,” arguing it shows a lack of confidence in Labour’s plans.
Reeves, meanwhile, has stayed firm on Labour’s “iron-clad” commitment to its fiscal rules. But with borrowing costs climbing and growth looking shaky, her options for the Budget are narrowing fast.