By Kris Billington, Director at McEwan Wallace.
The government's finances have just taken another knock. Long-term borrowing costs have jumped to their highest level in a generation, with the yield on 30-year gilts (government bonds) hitting 5.72% – a level not seen since 1998.
In plain English: it's suddenly much more expensive for the government to borrow money. That puts Chancellor Rachel Reeves under real pressure to find extra cash, and the most likely route is higher taxes when the Budget lands later this year.
And while that might sound like a Westminster problem, the ripple effects could easily reach businesses too.
Why borrowing costs matter
Governments borrow by selling bonds to investors, paying them back later with interest. The “yield” on those bonds is effectively the interest rate. When yields go up, the government has to shell out more just to service its debt. That leaves less money in the pot for day-to-day spending or investing in services.
Rachel Reeves has already nailed her colours to the mast with two strict rules she won't budge on:
- By 2029–30, all day-to-day government spending must be funded through tax income rather than borrowing.
- Government debt must be falling as a share of national income by the same year.
The problem? Her safety buffer is wafer-thin – some suggest around £10bn - £30bn – which is tiny when you're talking about a government budget.
Why are costs going up?
It's not just the UK feeling the pinch. Yields are climbing in Germany, France, the Netherlands and the US too. A few things are stirring the pot:
- The World Trade Organisation says we're in the middle of the biggest shake-up of global trade rules in 80 years. The fallout from US tariffs could really bite next year.
- Investors appear to be selling off UK government debt over worries about the UK's financial plans. To tempt them back, higher interest to be offered – pushing up costs.
What this means for the Autumn Budget
One economist reckons Reeves may need to rustle up between £18bn and £28bn in extra revenue at the Budget to avoid breaking her own rules. Cue tax rise speculation.
The government has pledged not to raise income tax, VAT, or National Insurance for “working people”. If that promise holds, Reeves has fewer levers to pull. Possible options being floated include:
- Extending the freeze on income tax thresholds – the so-called stealth tax that nudges more people into higher tax bands as wages rise.
- Reforming property taxes and stamp duty.
- Introducing National Insurance for landlords.
Right now it's all just talk, but it's clear the Chancellor is going to have some tough choices come autumn.
What this could mean for your business
Bond yields and gilts might sound a world away from your day-to-day, but the impact could be closer than you think:
- Potential tax changes – measures could be brought in to raise revenue.
- Economic headwinds – higher government borrowing costs could spill into the wider economy, making loans and investment pricier for businesses.
- Policy uncertainty – until the Budget is confirmed, planning ahead gets trickier.
Looking ahead
For now, businesses would do well to plan with caution. A good step would be to stress-test your finances to see how you'd cope with tax rises or more expensive borrowing.
The Budget later this year will set the tone for the economy – and with borrowing costs squeezing her options, the Chancellor's decisions could directly shape the environment UK businesses are operating in.
We'll keep you posted as the picture becomes clearer. In the meantime, if you'd like a hand thinking through what this could mean for your own finances, give us a call – we'd be happy to help