Government borrowing costs at highest since 1998 – what it means for your taxes ...Middle East

Long-term government borrowing costs have risen to 27-year highs, with fears it could lead to higher tax rises in the Autumn Budget.

The yield on UK government bonds – sometimes referred to as gilts – has jumped to the highest level since 1998.

Gilts are essentially someone lending money to the UK government in return for the promise of interest payments.

A higher yield means the government has to pay more money to investors.

Here’s why borrowing costs are rising according, according to experts, and what it means for possible changes in the Budget.

Government bonds have been under pressure globally, with yields rising across the United States and Europe.

Generally speaking, yields tend to rise in more uncertain economic times as investors look to be compensated for the bigger level of risk they are taking on.

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There are also specific circumstances that some experts say are leading to yields rising in the UK.

Michael Saunders, senior advisor at Oxford Economics, said there were multiple reasons behind the higher gilt yield.

“It largely reflects global factors, plus a bit of worry about sticky UK inflation, ongoing UK fiscal deficits, and long-term political risk caused by rise of Reform,” he said.

Meanwhile, Neil Wilson, UK investor strategist at Saxo Markets, said: “The market move was a sign that investors do not have confidence the Treasury will stick to its strict borrowing rules.”

The Government has a set of self-imposed rules that govern its tax and spending decisions.

On Monday, Prime Minister Sir Keir Starmer announced a major shake-up of his Downing Street team. Chancellor Rachel Reeves’ former deputy in the Treasury, Darren Jones, has become the Prime Minister’s chief secretary, and James Murray will replace him as Treasury chief secretary.

“Gilt yields in the UK rose after the Prime Minister reshuffled the deck, seemingly sidelining his iron Chancellor Reeves by poaching her deputy. If the Treasury won’t break the rules, then perhaps Number 10 can?” said Wilson.

What does the rise in gilt yields mean for taxes?

The rise in gilt yields increases the cost of servicing the Government’s debt, and so could end up increasing the amount that the Government has to raise via tax.

Most economists already accept that taxes will have to rise in the autumn, with experts split on how much they will have to go up by.

Ruth Gregory, deputy UK chief economist at Capital Economics, said market moves had already eroded the Chancellor’s headroom by £1bn.

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She said: “We now think she will have to raise £18bn to £28bn in the Autumn Budget, mostly via higher taxes.”

Thomas Pugh, economist at RSM UK said that if gilt yields stayed at this level, then it could probably cost the Treasury £4bn to £5bn by the time the Budget comes around in October or November.

He had previously forecast that the Government would need to raise taxes by about £20bn. He added: “We’re probably now in the £20bn to £25bn region.”

He said the extra costs could limit the Treasury’s ability to give good news.

Often at the Budget, the Chancellor will offset bad news – like tax rises – with a so-called ‘rabbit out of the hat’. This is usually a surprise positive measure, like a tax cut or a spending increase, that they expect to be popular with the public.

“In reality it probably just limits their ability to do any giveaways,” Pugh added.

Gold reaches record high as investors seek safety

In times of global economic turbulence, investors often look to put their money in a safe haven with gold often seen as one of the safest assets.

This has led to prices hitting a record high of $3,508.50 per ounce early on Tuesday.

Kathleen Brooks, research director at XTB, said: “A selloff in the bond market and a rush to the dollar and gold are signs that investors are rushing into safe havens and liquid assets as we move through the week.

“The allure of gold is unlikely to be dimmed in the near term.”

Gold has seen many hikes to prices this year, especially following Donald Trump’s controversial introduction of retaliatory tariffs on countries around the world.

Others factors influencing today’s surge include a weakening US dollar and the prospect of more interest rate cuts by the Federal Reserve.

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