UK borrowing surge pushes gilt yields higher as November tax rises loom

Official data show August borrowing totalled £18 billion, underscoring a surge in government spending that has helped push long-term gilt yields higher even as the Bank of England slows its tightening stance. The move came after Bank of England Governor Andrew Bailey signaled that further rate cuts are not imminent, a stance that has left investors cautious about the path of government debt costs. In early trading, the yield on 30-year gilts rose as much as five basis points as the Office for National Statistics confirmed August net borrowing of £18 billion, well above both last year’s level and City forecasts.

The ONS figures showed August net borrowing of £18bn, £3.5bn more than August last year and ahead of market expectations of about £12.8bn. They were also roughly £5.5bn higher than the Office for Budget Responsibility’s forecast in March. Soaring interest payments on the national debt contributed to the deterioration, with annual debt service costs up by about £1.9bn to £8.4bn, a reminder of the heavy burden carried by government financing plans over the coming year. By mid-morning, the 10-year and 30-year gilt yields had risen by around 2 basis points each, to about 4.7% and 5.53%, respectively, illustrating the sensitivity of long-term rates to fiscal headlines.

Ten-year and 30-year yields have climbed notably over the past 12 months—roughly 107 basis points and 80 basis points, respectively—reflecting investor reassessment of the sustainability of fiscal policy. While the year-to-date picture has shown some easing as the Bank of England indicated a slower pace of quantitative tightening, the August data reinforced concerns about the government’s fiscal stance and the potential spillovers into financing costs for households and businesses.

Martin Beck, chief economist at WPI Strategy, said the figures underscore the Chancellor’s mounting fiscal headaches ahead of the November Budget, with borrowing for 2025-26 possibly overshooting the OBR’s full-year forecast by nearly £20 billion and the deficit approaching 5% of GDP. He warned that the OBR may adopt a more pessimistic view on productivity, a factor that could widen the gap between planned revenue and spending. “That means tax rises in November look inevitable. The choice of which taxes to raise will be critical,” Beck said. “Levies that fall on businesses and are passed through to consumers, as with last April’s hike in employer NICs, risk stoking inflation and undermining growth. By contrast, there is scope for revenue-raising reforms that would make the tax system more efficient, but these come with political risks that a government, faced with fractious backbenchers and shaky support, may be reluctant to take.”

The August outturn also reflected higher-than-expected government outlays on benefits and public services, which offset some of the impact of the rise in employer National Insurance contributions. The combination of stronger spending and a more challenging growth backdrop has left investors weighing how the Budget in November will balance the books without choking growth. In the recent past, markets had priced in a more aggressive path of rate cuts, but Bailey’s remarks tempered those expectations, keeping gilt yields elevated even as the BoE’s QT program slowed.

Investors remain focused on how policymakers will manage a deficit that has widened more than anticipated and what that means for near-term borrowing costs. Analysts say the upcoming Budget could hinge on whether policymakers choose to shield growth through targeted tax relief or pursue broader revenue-raising reforms that could reshape the tax system over the medium term. The questions extend beyond the cash register: productivity, potential energy prices, and global demand all shape the trajectory of public debt and the sustainability of the fiscal framework. As the government navigates a challenging fiscal environment, the markets will be watching closely for signals about the stance of fiscal policy, the path of interest rates, and the risk of further revisions to growth and debt projections.

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The data come as gilt yields have moved in response to shifting expectations about the pace of fiscal consolidation and monetary policy. Ten-year and 30-year rates have shown remarkable sensitivity to headlines about borrowing and debt service costs, and the August outturn will likely feed into the Chancellor’s budgeting calculations as officials weigh how best to chart a path toward deficit reduction without derailing economic momentum. While some observers anticipate targeted measures to shield growth, others warn of the risks of tax rises that could dampen demand and investment in the near term. The November Budget promises to be a focal point for assessing how Britain plans to finance its ambitious spending commitments while maintaining a credible trajectory for debt stabilization in the medium term.

In the meantime, markets will continue to monitor the dynamics of government debt costs and the signals from the Bank of England about the rate path, as well as any guidance on the boundaries of fiscal policy that could emerge from the hurried tempo of policy announcements ahead of the Budget.