The government is paying more to borrow through newly issued debt than at almost any point in the past three decades, a reminder of the tough fiscal backdrop against which prime minister Andy Burnham and chancellor John Healey are drawing up their first budget, now less than two months away.
The average yield on UK government bonds, or gilts, sold to investors so far this year is 3.8 per cent, according to analysis of figures published by the Debt Management Office, the body responsible for selling the government’s debt. That is not far short of levels last seen in 1998, when the average yield on newly issued debt exceeded 4 per cent.
Yields have held close to that near three-decade high for the past two years, the product of stubborn inflation, investor unease about persistently high public borrowing across the rich world, and hundreds of billions of pounds worth of gilt sales by the Bank of England as it unwinds the bond holdings built up under quantitative easing.
The rising cost of compensating the investors who buy that debt has heaped fresh pressure on the public finances. The Office for Budget Responsibility forecasts that debt interest spending will exceed £100 billion a year, the equivalent of the defence and Home Office budgets combined, until at least the 2030s.
Public borrowing has already overshot official forecasts this financial year, and economists have warned the pair that the headroom against the government’s main fiscal rule, which requires day-to-day spending to be funded by tax revenues, may have more than halved from £23.7 billion because of rising gilt yields and the higher energy prices that have followed the outbreak of war in the Middle East six months ago.
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