Economists have warned the rise could mean further tax hikes or spending cuts by the government.
Pound falls further as UK borrowing costs soar
Getty ImagesThe pound has dropped to its lowest level for a over year and UK government borrowing costs have continued to rise as concerns about about public finances and the economy grow.
Sterling started to drop after UK 10-year borrowing costs rose again, surging to their highest level for 16 years.
Economists have warned the rising costs could lead to further tax rises or cuts to spending plans as the government tries to meet its self-imposed borrowing target.
The Treasury said: “No one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances.”
It added that Chancellor Rachel Reeves would “leave no stone unturned in her determination to deliver economic growth and fight for working people”.
The government said on Wednesday it would not say anything ahead of the official borrowing forecast from its independent forecaster due in March.
Shadow chancellor Mel Stride claimed that Reeves’ significant spending and borrowing plans in the autumn Budget were “making it more expensive for the government to borrow”.
“We should be building a more resilient economy, not raising taxes to pay for fiscal incompetence,” he said in a post on X.
The pound continued to fall on Thursday, slipping by 0.9% to $1.226 against the dollar, and borrowing costs rose further.
The pound typically rises when borrowing costs increase but economists said wider concerns about the strength of the UK economy had driven it lower.
The government generally spends more than it raises in tax. To fill this gap it borrows money, but that has to be paid back – with interest.
One of the ways it can borrow money is by selling financial products called bonds.
“It’s not good news,” Mohamed El-Erian, chief economic advisor at asset manager Allianz told the BBC’s Today programme.
He said the rise in borrowing costs means that how much interest the government pays on its debt goes up and “eats up more of the tax revenue, leaving less for other things”.
Mr El-Erian added that it can also slow down economic growth “which also undermines revenue”.
“So the chancellor, if this continues, will have to look at either increasing taxes or cutting spending even more – and that’s going to impact everyone,” he said.
At the end of last year, revised figures showed the economy had zero growth between July and September.
It was the latest in a series of disappointing figures, including a rise in inflation in the year to November with prices rising at their fastest pace since March.
In December, the Bank of England said the economy is likely to have performed worse than expected in the last three months of 2024.
At the same time, it held interest rates at 4.75% citing “heightened uncertainty in the economy”.
Globally, there has been a rise in the cost of government borrowing in recent months sparked by investor concerns that US President-elect Donald Trump’s plans to impose new tariffs on imports from Canada, Mexico and China would push up inflation.
The cost of government borrowing in the US has seen a similar rise to that of the UK.
“It may be a global sell-off, but it creates a singular headache for the UK chancellor looking to spend more on public services without raising taxes again or breaking her self-imposed fiscal rules,” said.Danni Hewson, head of financial analysis at AJ Bell.
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