Britain’s Economic Woes: A Perfect Storm of Rising Borrowing Costs and Sluggish Growth
The UK’s new government, already facing criticism over tax hikes, unpopular spending decisions, and political scandals, is now grappling with a new challenge: rising borrowing costs that threaten to derail its left-leaning agenda. The yield on the UK’s 10-year bonds has surged by over 1.1 percentage points since September 16, driven by concerns over sluggish economic growth and stubbornly high inflation.
The Consequences of Rising Borrowing Costs
As borrowing costs rise, the government has less money to allocate to essential services like the National Health Service, military, emergency services, and schools. This could force Prime Minister Keir Starmer to reassess his promises to boost spending and avoid tax increases on “working people” that helped his Labour Party win a landslide election victory in July.
Global Factors at Play
The return of US President-elect Donald Trump, who has pledged to increase taxes on imported goods, has sent shockwaves through the global economy and boosted bond yields worldwide. This has led to higher borrowing costs for countries like the UK, which is particularly exposed due to its high levels of government debt and sluggish economic growth.
The State of Britain’s Economy
Consumer price inflation remains above the Bank of England’s 2% target, while the economy has stagnated in recent months. The latest government statistics show that gross domestic product was stagnant in the three months through September, after growing 0.7% in the first quarter and 0.4% in the second. This is partly due to the government’s decision to boost payroll taxes paid by employers and increase workplace regulation, causing some companies to curtail investment and hiring.
Debt Levels Reach Historic Highs
UK government debt stands at over 98% of economic output, the highest level since 1963. Treasury chief Rachel Reeves had been counting on economic growth to help reduce debt as a percentage of GDP, but rising borrowing costs will make meeting those goals more difficult.
A Difficult Balancing Act
Reeves may need to reconsider her promises to avoid tax increases on “working people” and boost spending, but abandoning these pledges could be politically costly. The government is taking risks, such as reaching out to China to boost trade and business ties, despite national security concerns.
What’s Next?
Reeves may run out of options if borrowing costs stay high, curtailing the amount of money she has to spend. A policy shift could come as early as March 26, when Reeves is due to update Parliament on the country’s financial position and the Office for Budget Responsibility will update its economic and fiscal forecasts. While investors may be nervous, experts believe that financial markets can be volatile but tend to even out over the longer term.
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