![\"Rachel](\"https:\/\/dailybusinessgroup.co.uk\/wp-content\/uploads\/2025\/11\/Rachel-Reeves-leaves-to-deliver-Budget.png\")
Market confidence in Sir Keir Starmer and Rachel Reeves has picked up, signalling the end of the UK\u2019s \u201crisk premium\u201d in borrowing costs, according to a think tank.<\/p>\n
The Chancellor\u2019s commitment to keeping to her fiscal rules has won support among investors who have priced yields lower in recent months, potentially saving the taxpayer billions in interest charges.<\/p>\n
The government had faced uniquely high borrowing costs, compared to its peers. UK yields had increased by 40-80 basis points more than its competitors since the election, costing the exchequer between \u00a32bn-\u00a37bn a year.\u00a0<\/p>\n
At its peak, government borrowing costs were six times more expensive than pre-pandemic, and 30-year borrowing costs had risen by 4.1 percentage points since 2022 \u2013 150 basis points more than the US and 100 basis points more than the Eurozone.\u00a0<\/p>\n
However, 10-, 20- and 30-year borrowing costs have fallen by 20 basis points more than comparative countries since Rachel Reeves\u2019 speech at Labour party conference in September, suggesting that the UK premium may finally be coming to an end, says the Institute for Public Policy Research.<\/p>\n
Itr says the reasons for this premium are not straightforward, especially given that the UK\u2019s economic fundamentals are stronger than those of many countries with lower borrowing costs. <\/p>\n
The UK\u2019s debt-to-GDP ratio is 101%, compared with 122% in the US and 237% in Japan, and the government is planning to halve the amount it borrows each year by the end of this parliament. <\/p>\n
This suggests the problem may be less about the policy plans themselves and more about whether markets believe they will be delivered.<\/p>\n
While the premium has steadily increased in the last year, this problem had been brewing for some time. The premium first spiked following Liz Truss\u2019s mini-budget which coincided with borrowing costs around the globe sharply increasing.\u00a0<\/p>\n
However, confidence is clearly growing in the government as borrowing costs have been falling since September 2025. Government borrowing is on track to halve over the course of this parliament. <\/p>\n
This is making the UK\u2019s coming fiscal consolidation the fastest in the G7, which has led to the IMF giving the UK\u2019s fiscal policy its blessing, saying the UK\u2019s \u201cfiscal plans strike a good balance between supporting growth and safeguarding fiscal sustainability.\u201d\u00a0\u00a0\u00a0<\/p>\n
The UK is on track to spend \u00a392bn on interest payments on its debt this year \u2013 about 7.5 per cent of government receipts.<\/p>\n
William Ellis, senior economist at the IPPR, said:\u00a0 \u201cThe premium on UK borrowing costs appears to be easing, showing that markets are responding to growing confidence in the government\u2019s fiscal approach. Sticking to its fiscal plans could save the Exchequer billions and free up fiscal space in the future.\u201d\u00a0<\/p>\n
Carsten Jung, associate director for economic policy at the IPPR, said: \u00a0\u201cThe UK is paying more than other major economies to borrow. To be clear, we\u2019re not at risk of going broke \u2014 but investors are unsure how to price UK debt because they don\u2019t know how much more borrowing is coming down the line.\u00a0<\/p>\n
\u201cWith clear, credible fiscal plans, the UK could be a star performer in the G7 \u2014 and simply reassuring markets that we\u2019ll stick to those plans could save billions.\u00a0<\/p>\n
\u201cThe Bank of England also needs to pull its weight. Actively selling government bonds is adding unnecessary pressure to the gilt market. It should stop \u2014 just as every other major central bank has.\u201d\u00a0<\/p>\n
Dave Ramsden, a deputy governor at the Bank of England, told MPs on the cross-party Treasury committee on Tuesday that bond market volatility was lower in the run-up to Reeves\u2019s budget last month than for fiscal events overseen by the Conservatives at the end of their parliamentary tenure.<\/p>\n
Markets were orderly after the budget and there \u201cwere no concerns\u201d about financial stability, \u201cwhich of course there have been on previous occasions in the UK and in other jurisdictions\u201d, he said.<\/p>\n
Bank officials said that the budget could lower inflation by up to 0.5 percentage points from its present level of 3.6%. Britain has had the highest government borrowing costs in the G7 for some time, initially caused by the financial market chaos after Liz Truss\u2019s mini-budget three years ago.<\/p>\n
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