Press Story

UK borrowing costs had increased by 0.4 to 0.8 percentage points more than major peers since the 2024 election
But 10, 20, and 30-year gilt yields have all fallen sharply in recent months
IPPR urges government to stay the course and prioritise reassuring markets that it will deliver on its fiscal plans

The steadily rising premium added to UK borrowing costs since Labour took office in 2024 is showing signs of unwinding, according to new analysis by IPPR.

The government had faced uniquely high borrowing costs, compared to its peers. UK yields had increased by 40-80 basis points more than its competitors since the election, costing the exchequer between £2bn-£7bn a year.

At its peak, government borrowing costs were six times more expensive than pre-pandemic, and 30-year borrowing costs had risen by 4.1 percentage points since 2022 – 150 basis points more than the US and 100 basis points more than the Eurozone.

However, 10-, 20- and 30-year borrowing costs have fallen by 20 basis points more than comparative countries since Rachel Reeves’ speech at Labour party conference, highlighting that the UK premium may finally be coming to an end.

The reasons for this premium are not straightforward, especially given that the UK’s economic fundamentals are stronger than those of many countries with lower borrowing costs. The UK’s debt-to-GDP ratio is 101 per cent, compared with 122 per cent in the US and 237 per cent in Japan, and the government is planning to halve the amount it borrows each year by the end of this parliament. This suggests the problem may be less about the policy plans themselves and more about whether markets believe they will be delivered.

The report authors highlight a few potential reasons for high borrowing costs in the UK, including:

Uncertainty about whether the government will credibly deliver on its fiscal plans
The Bank of England’s Quantitative Tightening programme, selling government bonds faster and at far higher rates than other central banks
The exit of UK defined benefit pension schemes, shifting reliance to international investors to buy government bonds

While the premium has steadily increased in the last year, this problem had been brewing for some time. The premium first spiked following Liz Truss’ disastrous mini-budget which coincided with borrowing costs around the globe sharply increasing.

However, confidence is clearly growing in the government as borrowing costs have been falling since September 2025. The UK is spending on growth-enhancing investment, and the planned fiscal consolidation is the fastest in the G7. This has led to the IMF giving the UK’s fiscal plans its blessing, saying the UK’s “fiscal plans strike a good balance between supporting growth and safeguarding fiscal sustainability.”

The UK is on track to spend £92bn on interest payments on its debt this year – about 7.5 per cent of government receipts. The authors of the IPPR report say that continuing to assure markets could save the Exchequer billions of pounds in reduced borrowing costs. They recommend:

Sticking to the current set of fiscal plans, to reassure the markets and prove credibility
Pausing the Bank of England’s active gilt sales as part of quantitative tightening to reduce the UK premium
Strongly reducing issuance of long dated gilts, and making the Debt Management Office shift reliance towards medium-term debt

There are still some circumstances where more borrowing compared to current plans could be sensible – in an economic crisis for example. Similarly, the government could borrow to invest if it could clearly show that this funds projects with high economic returns.

William Ellis, senior economist at IPPR, said:

"The premium on UK borrowing costs appears to be easing, showing that markets are responding to growing confidence in the government’s fiscal approach. Sticking to its fiscal plans could save the Exchequer billions and free up fiscal space in the future."

Carsten Jung, associate director for economic policy at IPPR, said

“The UK is paying more than other major economies to borrow. To be clear, we’re not at risk of going broke — but investors are unsure how to price UK debt because they don’t know for sure how much more borrowing is coming down the line.

“With clear, credible fiscal plans, the UK could be a star performer in the G7 — and simply reassuring markets that we’ll stick to those plans could save billions.

“The Bank of England also needs to pull its weight. Actively selling government bonds is adding unnecessary pressure to the gilt market. It should stop — just as every other major central bank has.”

ENDS

William Ellis and Carsten Jung are available for interview

CONTACT

Liam Evans, head of news and media: 07419 365 334 l.evans@ippr.org

David Wastell, director of news and communications: 07921 403651 d.wastell@ippr.org

NOTES TO EDITORS

Advance copies of the report are available under embargo on request
Analysis of the UK bond premium is based on a comparison of long-term UK Gilt yields against sovereign debt benchmarks in the US (Treasury yields) and the Euro Area (AAA-rated bonds). The analysis is also informed by market measures of investor sentiment including inflation and interest rate expectations.
IPPR (the Institute for Public Policy Research) is the UK’s most influential think tank, with alumni in Downing Street, the cabinet and parliament. We are the practical ideas factory behind many of the current government’s flagship policies, including changes to fiscal rules, the creation of a National Wealth Fund, GB Energy, devolution, and reforms to the NHS. As an independent charity working towards a fairer, greener, and more prosperous society, we have spent almost 40 years creating tangible progressive change - turning bold ideas into common sense realities. www.ippr.org