UK borrowing surge lifts gilt yields as November tax plans loom

Long-term government borrowing costs climbed again on Friday after official data showed August borrowing far exceeded forecasts, reinforcing investor bets that the November Budget will include tax increases. The move came as the Bank of England signaled that further interest-rate reductions may be limited in the near term, keeping debt costs elevated for longer.

Official data from the Office for National Statistics showed August net borrowing at £18 billion, up £3.5 billion from August last year and far above market expectations of about £12.8 billion. The outcome was also £5.5 billion higher than the Office for Budget Responsibility’s March forecast. The government also spent more on benefits and public services last month, offsetting a smaller boost from the increase in employer national insurance contributions.

Long-term gilt yields rose in early trading, with the yield on 30-year gilts climbing as much as five basis points. By midmorning, 10-year and 30-year yields were up by about 2 basis points each, at roughly 4.7% and 5.53%, respectively. The jump reflected a broader move in government debt costs, driven by the August outturn and heightened concerns about the trajectory of fiscal policy.

Debt-service payments linked to state borrowing also shifted higher, with net interest on government debt rising by about £1.9 billion to around £8.4 billion in August. The combination of larger borrowing and rising yields underscored the cost of financing a swelling national debt as investors reassess fiscal settings.

Martin Beck, chief economist at WPI Strategy, said the August figures underscore the chancellor’s looming fiscal headaches ahead of November's Budget. Beck warned that, at the current pace, borrowing in 2025-26 could overshoot the OBR’s full-year forecast by nearly £20 billion, pushing the deficit close to 5% of GDP. He noted that informed speculation suggests the OBR may take a more pessimistic view on productivity, which would further shade the fiscal outlook and fuel discussion of a fiscal “black hole.”

That context makes tax policy a central question for the government. Beck said a tax rise in November looks inevitable, though he stressed that the form and scope of any measures will be critical. Levies that fall on businesses and are passed through to consumers, such as past NIC increases, carry inflation risks and could hamper growth. By contrast, he cited the potential for revenue-raising reforms that improve tax system efficiency, albeit with political risks in a fractious parliamentary environment.

Over the past year, long-dated yields have climbed sharply as investors priced in fiscal risks. Ten-year yields have risen about 107 basis points and 30-year yields about 80 basis points year on year, though some easing has occurred in the past month as the Bank of England signaled a slower pace of quantitative tightening.

The August outturn also coincides with remarks from Bank of England Governor Andrew Bailey, who on Thursday suggested that the case for further rate cuts was not as clear-cut as earlier expected. While the BoE has pursued a cautious path, today’s data will bolster the case for policy caution and a careful approach to fiscal consolidation. Markets will continue to monitor both the Budget’s tax strategy and any steps toward reining in debt costs, as gilt investors weigh the risk of higher taxes against the need to sustain growth in a high-debt environment.