Bond yields soar to 2008 levels, hurting Hunt's tax cut dreams

Rising borrowing costs and expected rising interest rates are expected to cost the Chancellor an additional £12bn a year by 2027. Credit: PA/Jordan Pettitt /PA/Jordan Pettitt

The cost of government borrowing has soared to its highest level since 2008, dashing Jeremy Hunt's hopes of a pre-election tax cut.

Yields on 10-year government bonds hit a 15-year high of 4.7% on Thursday as investors bet that interest rates will have to rise even higher to tame inflation.

Securities yields in has now surpassed both the post-mini-budget peak last fall and the most recent high of 4.66% recorded in July.

Rise in borrowing costs and expected rise in interest rates Economists say by 2027 they will receive an additional £12 billion a year.

This will more than wipe out the chancellor's meager financial resources and mean that tax cuts before next year's elections will be difficult without spending cuts.

>Forecasts also put Prime Minister Rishi Sunak at risk of not delivering on his promise to cut debt.

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Borrowing costs jumped after higher-than-expected wage growth and persistently high core inflation data released this week.

0906 Net debt as a percentage of GDP

Althea Spinozzi, fixed income strategist at Saxo Bank, said: «Markets understand that the Bank of England is not controlling inflation and the economy is deteriorating rapidly.»

The city's traders are now betting that the Bank of England will be forced to bring interest rates to a peak of 6% and keep them at this level, at least until next summer. A week ago, markets were expecting a peak between 5.5% and 5.75%.

The cost of borrowing around the world has risen sharply in recent days as investors worry about how long it will take for inflation to take control.< /p>

US Treasury yields also jumped to their highest level since 2008 on Thursday, while German bonds were close to levels not seen since 2011.

The combination of rising security yields and high interest rates will drive up the value UK government loans of £12bn by 2027-2028 compared to Office of Budget Responsibility (OBR) March forecasts.

The extra spending is nearly double the modest £6.5bn budget the Chancellor gave himself in March.

Carl Williams, Associate Director of Research at the Center for Policy Studies, said: “It is fair to say that this the stock could be erased twice.”

He added: “Based on the current position, with interest rates one percentage point higher than expected, it looks like debt will rise towards the end of the forecast window, or at least , will not fall».

1708 persistent inflation

This represents another blow to the chancellor's ambitions to cut taxes ahead of next year's elections. Carl Emmerson, associate director of the Institute for Financial Studies, said higher taxes are actually more likely.

Mr Emmerson said: unlikely.

“It is much more likely that over the next two or three years we will see announced measures that result in net tax increases.”

Lloyds Bank said 13 of the 14 economic sectors it monitors suffered a drop in new orders in July, while 10 reported a drop in output.

In more UK sectors, output contracted than at any time in the past eight months, the bank said, blaming high interest rates and inflation.< /p>

Nikesh Savjani, Senior Economist at Lloyds Bank Corporate & Institutional Banking said: «This month's data clearly indicate a slowdown in economic activity, largely driven by a further significant weakening in demand.»

Mr Hunt's margin of £6.5bn was already the lowest established budget. aloof from any chancellor since the OBR was created 13 years ago.

The financial hit from higher borrowing costs could be mitigated by higher income tax receipts due to fiscal drag.

High economic growth will also solve the problem. However, Mr Williams said: «Given where we are now, this seems unlikely.» Additional borrowing right now will spur inflation, raise mortgage rates, and increase interest payments on debt, diverting money away from our public services.

“We were right to protect families and businesses from the pandemic and Putin’s energy shock . , but now we must stick to our plan to halve inflation, grow the economy and reduce debt.”