The pound has fallen to its lowest level for nine months after UK government borrowing costs continued to rise.
The drop came as UK 10-year borrowing costs surged to their highest level since the 2008 financial crisis when bank borrowing almost ground to a halt.
Economists have warned the rising costs could lead to further tax rises or cuts to spending plans as the government tries to meet its self-imposed borrowing target.
The government said it would not say anything ahead of the official borrowing forecast from its independent forecaster due in March.
“I’m obviously not going to get ahead … it’s up to the OBR (Office for Budget Responsibility) to make their forecasts.”
“Having stability in the public finances is precursor to having economic stability and economic growth,” the Prime Minister’s official spokesman said.
Shadow chancellor Mel Stride claimed that the Chancellor’s significant spending and borrowing plans from the Budget are “making it more expensive for the government to borrow”.
“We should be building a more resilient economy, not raising taxes to pay for fiscal incompetence,” he said in a post on X.
Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments, said the rise in borrowing costs “has effectively eviscerated Reeves’ fiscal headroom, threatening to derail Labour’s investment promises and potentially necessitate a painful recalibration of spending plans.”
The warning comes after the cost of borrowing over 30 years hit its highest level for 27 years on Tuesday.
Meanwhile the pound dropped by as much as 1.1% to $1.233 against the dollar, marking its lowest level since April last year.
The government generally spends more than it raises in tax. To fill this gap it borrows money, but that has to be paid back – with interest.
One of the ways it can borrow money is by selling financial products called bonds.
Globally, there has been a rise in the cost of government borrowing in recent months sparked by investor concerns that US President-elect Donald Trump’s plans to impose new tariffs on goods entering the US from Canada, Mexico and China would push up inflation.
Laith Khalaf, head of investment analysis at AJ Bell, said chancellor Rachel Reeves’ Budget in October, which increased borrowing, may have had a small impact but said the UK rises were similar to those in the US.
“In the UK higher yields put pressure on government finances and increase the risk that Reeves will come back with another tax raising Budget,” he said.
But he also said the current rises in borrowing costs could be “a storm in a tea cup which dissipates quickly.”
The official forecaster, the Office for Budget Responsibility (OBR), will start the process of updating its forecast on government borrowing next month to be presented to parliament in late March.
