Concerns about the possible impact of the local elections – along with the Iran war – have triggered a surge in UK government borrowing costs
The government’s long-term borrowing costs have hit the highest level since 1998 amid the fall-out from the Iran war and speculation about PM Keir Starmer’s future.
The yield – interest rate – on 30-year government bonds peaked at 5.77% around lunchtime on Tuesday. It took the rate above the 27-year high seen last September, and risks further driving up the government’s borrowing bill, just when the economy has been weakened by the impact of the Middle East conflict.
The FTSE 100 of the UK’s biggest listed companies also took a hit, falling nearly 130 points – or 1.27% – to 10,232.71 at 1pm. The yield on 10-year gilts – which are seen as more reflective of new public debt costs – also rose, pushing past the 5% level to 5.095% and on track for their highest close since 2008.
The UK is not alone, with US and German yields also rising on continued disruption to shipping in the Strait of Hormuz. However, it comes ahead of uncertainty about the political impact of this Thursday’s local elections and what it could mean for the Labour party. Investors have reacted to the possibility of a challenge to Sir Keir’s premiership if Labour performs badly this week.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, warned a change of leadership risked pushing up government borrowing costs even higher.
He explained: “The war in Iran has meant domestic politics has largely taken a back seat for the last couple of months. However, political risk jumped back up the agenda last week and is only likely to intensify if the local elections on Thursday go as badly for the government as expected.
“For the economy, the prospect of a leadership challenge is yet another source of uncertainty for businesses and households that could prompt them to put off investment and spending.
“What’s more, financial markets would likely respond by pushing gilt yields higher, as any successor is likely to be more spendthrift than Starmer and Reeves, raising borrowing costs across the economy.
“The risk is that a messy leadership contest, which causes another round of speculation about tax hikes, potentially followed by another budget would compound the drag on growth from higher energy prices and tip the economy further into stagnation.”
The total amount the government owes – the national debt – is currently about £2.9 trillion. This is almost as much as the value of all the goods and services produced in the UK in a year, known as the gross domestic product, or GDP.
Higher gilt yields drive up the cost of servicing the public sector’s borrowing costs, which the Office for Budget Responsibility estimated would be £111billion in the last financial year.
