UK borrowing costs may ease

Published: 10 December 2025. The English Chronicle Desk. The English Chronicle Online.

The United Kingdom’s higher borrowing costs compared with major global economies may finally be showing signs of easing, a new analysis from the Institute for Public Policy Research (IPPR) suggests. Recent market reactions indicate that investors are becoming increasingly confident in the government’s fiscal management and the policies outlined in the autumn budget.

IPPR highlighted that Chancellor Rachel Reeves’s announcement to more than double the UK’s financial headroom by 2030, from £9.9 billion to £22 billion, has provided reassurance to bond markets regarding the Labour government’s fiscal discipline. The thinktank emphasized that the move could mark a significant turning point in the cost of borrowing for the UK, which has historically faced a “credibility premium” relative to other major economies.

Government bond yields, the returns investors receive for lending to a country, have been climbing worldwide due to rising inflation, increased interest rates, and larger fiscal deficits. Yet, the UK’s gilt yields have consistently been higher than those in the United States and the eurozone. IPPR explained that the UK’s elevated borrowing costs stem largely from skepticism over whether its governments consistently deliver on fiscal promises.

Since the Labour Party’s 2024 election victory, UK yields have exceeded those of major peers by 0.4 to 0.8 percentage points, resulting in additional interest costs to taxpayers of up to £7 billion annually. So far, the government has allocated £92 billion to service debt in the current financial year, underscoring the real impact of higher borrowing premiums on public finances.

Interestingly, the fundamentals of the UK economy suggest it should face lower borrowing costs. The debt-to-GDP ratio stands at 101%, which is lower than the 122% recorded in the United States and far below Japan’s 237%. Furthermore, the government intends to reduce annual borrowing by half by the end of the current parliamentary term. These fiscal realities indicate that the UK’s elevated costs are more about perception than structural weakness.

IPPR traced the roots of this credibility issue to repeated policy inconsistencies over the past decade. The 2022 mini-budget under Liz Truss’s administration, for example, demonstrated how swiftly a UK government could circumvent established fiscal frameworks, shaking investor trust. Between 2016 and the 2024 election, seven chancellors had either altered, missed, or redefined fiscal rules, amplifying doubts about the reliability of stated policy objectives. IPPR stressed that investors have increasingly viewed actions as more indicative of fiscal direction than official statements, creating a persistent “trust deficit.”

However, the recent autumn budget has already shown measurable effects. The premium on UK borrowing relative to the eurozone nearly halved following Reeves’s announcement. William Ellis, IPPR’s senior economist, noted that the easing premium demonstrates growing confidence in the government’s fiscal approach. He emphasized that consistent adherence to planned fiscal policies could save billions of pounds and create additional fiscal flexibility for future public investment.

Beyond government policy, IPPR identified the Bank of England’s role in influencing borrowing costs. The central bank has been actively selling government bonds at a record pace, adding pressure to the gilt market. Carsten Jung, associate director for economic policy at IPPR, suggested that a pause in bond sales could help stabilize borrowing costs, aligning with the practices of other major central banks globally.

“The Bank of England needs to pull its weight. Actively selling government bonds is unnecessarily increasing market pressure,” Jung stated, highlighting that coordinated fiscal and monetary measures could accelerate the reduction of the UK premium.

Overall, these developments suggest a potential shift in the UK’s borrowing landscape. If markets continue to respond positively to disciplined fiscal management, the longstanding extra cost of borrowing may decline. For taxpayers, this could translate into billions saved annually, freeing resources for investment in infrastructure, public services, and long-term growth initiatives.

As the UK moves forward, maintaining policy credibility will remain critical. Investors are keenly monitoring fiscal adherence, and any deviation could reverse the modest improvements observed. Yet, the autumn budget represents a promising start toward reducing the “UK premium” and aligning borrowing costs more closely with economic fundamentals.

The easing of the UK’s borrowing costs could also influence international perceptions of the country’s economic stability, potentially attracting further investment. Analysts suggest that if fiscal discipline is sustained and the Bank of England moderates its bond sales, the UK may finally achieve borrowing conditions comparable to other major economies.

While challenges remain, including global economic uncertainties and domestic spending pressures, the current trajectory offers a cautiously optimistic outlook. Strengthened market confidence, underpinned by transparent and consistent fiscal policy, could mark a turning point in the United Kingdom’s economic narrative, ending a decade of heightened borrowing costs.