Borrowing costs soar to highest in decades, leaving Prime Minister facing £14bn Budget shortfall
Daily Telegraph 01/09/26
Andy Burnham’s Commons debut as Prime Minister on Tuesday was overshadowed by a market rout that sent borrowing costs to their highest in decades.
Addressing MPs for the first time since entering No 10, Mr Burnham claimed that “life is too expensive and too hard for too many”, blaming Brexit and Margaret Thatcher for “low growth and stalled regeneration”.
Pledging to bring back hope to Britain, the Prime Minister said he would deliver “much more substantial change” to the economy to reduce household bills.
However, he now faces a shortfall of up to £14bn in his autumn Budget following a surge in gilt yields, which will squeeze his plans for higher spending.
Britain’s borrowing costs have risen at one of the fastest paces in the world, with interest rates on 10-year gilts, a benchmark for the Treasury, reaching their highest level since 2008.
The cost to borrow over 20 years rose to its highest since 1998, signalling growing stress in the market.
Government borrowing costs around the world have climbed sharply in recent weeks, amid concerns about unsustainable debts and persistent inflation.
However, Britain suffered the biggest increase in bond yields in the G7 on Tuesday, and economists warned that investors were nervous ahead of Mr Burnham’s first Budget.
Lord O’Neill, a former Goldman Sachs economist who turned down an offer to join Mr Burnham’s Government, said “the tone” of the Prime Minister’s speech was “the last thing investors wanted to hear”.
“If it stays like this, the mortgage rates are going up”, he told LBC.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “There’s a lot hinging on this from a market standpoint. Getting the bond maths wrong at this juncture could risk a painful sell-off.”
Higher borrowing costs will erode the amount Mr Burnham and John Healey, the Chancellor, can spend without either raising taxes or breaking the borrowing rules set out by Rachel Reeves, Mr Healey’s predecessor.
Ruth Gregory, at Capital Economics, estimated that the rise in borrowing costs had reduced the Government’s Budget headroom by £9bn, taking it from nearly £24bn at the time of the spring statement in March to around £15bn today.
She added: “As things stand, this may mean Chancellor Healey is caught in the same headroom trap as Reeves and needs to cut government spending and/or raise taxes by something like £9bn to £14bn to restore headroom and maintain fiscal credibility.”
The Government is expected to spend more than £130bn on interest on the near-£3tn national debt this year, with rising rates set to push this higher.
Mr Burnham has made a succession of expensive promises on the campaign trail and since becoming Prime Minister, including to spend more money on council housing, defence, devolution and public control of services.
Addressing a “series of wrong turns” by governments since the 1980s, he told MPs: “Political power was centralised, economic power privatised, the country deindustrialised. Austerity followed, hollowing out councils and depriving them of the agency to act to reverse any of this.
“And then Brexit compounded the damage, ushering in a decade of low growth and stalled regeneration. Change begins with honesty, and I’m not hearing much of it this afternoon.
“Unless we are blunt about what went wrong, we won’t turn things around.”
He added: “The Government I lead will be relentless in giving people and places what they were promised 10 years ago, ownership and control, and from that control over their destiny comes change and growth.”
Britain’s relationship with Europe is set to be discussed when Mr Burnham meets Emmanuel Macron, the French president, on Thursday, before a “reset” meeting expected to take place in November.
Mr Burnham voiced support for rejoining the EU while mayor of Greater Manchester, but during the Makerfield by-election he promised to stick to Labour’s manifesto pledge not to rejoin the bloc or the single market.
Speaking on Tuesday, Mr Burnham also said Labour would be “relentless” in taking more public control of water and energy.
No final decision on tax rises
The Treasury insists that it has made no final decisions on tax rises, but Mr Burnham has signalled he would be willing to increase some taxes without breaching Labour’s pledge not to touch income tax, National Insurance contributions for employees or VAT.
The plans are thought to include a potential levy on the banking sector and oil and gas companies, and a rise in the rate of capital gains tax.
Addressing Mr Burnham from the Dispatch Box for the first time on Tuesday, Kemi Badenoch called on him to rule out any further tax rises in the Budget.
“He says he cares about the cost of living, [but] Labour’s taxes have made that worse,” the Tory leader said.
“If he does not change course, he too, like every other Labour prime minister, will leave office with unemployment higher than when he came in.”
The Conservatives claimed that borrowing costs were rising because government policies were driving away investors.
Andrew Griffith, the shadow chancellor, said: “Labour’s reckless spending and higher taxes are killing growth and investors know it. Every time this rate goes up, so do mortgage rates and the burden for the next generation.”
David Aikman, director of the National Institute of Economic and Social Research, said years of heavy borrowing had left Britain vulnerable to rises in borrowing costs in global markets.
“Nobody likes to think about whether taxes will go up or spending will be cut. These are difficult decisions. But the consequence of not making these decisions is that we are at the mercy of market moves like this,” he said.
Supermarket chiefs on Tuesday warned Mr Burnham and Mr Healey against a fresh tax raid on shops, saying the move would worsen the cost-of-living crisis and make it harder to tackle youth unemployment.
The Retail Jobs Alliance, which counts Marks & Spencer, Tesco, Asda, Morrisons, Primark and Sainsbury’s among its members, said in a letter to the Prime Minister that higher property taxes on large shops could lead to higher prices for customers.
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