The cost of issuing new UK government debt is near its highest level for almost 30 years ahead of the crunch Autumn Budget.
The difficult task facing Andy Burnham and John Healey in their first Budget on October 28 has been highlighted by figures revealing the average interest rate across newly issued gilts, as UK government bonds are known, is close to three-decade highs.
The rate demanded by investors to buy UK debt has been driven up by persistent inflation, high borrowing levels, political instability, and most recently worries over the impact of the Iran war on the cost of living.
Fears the Bank of England may be forced to raise interest rates have also contributed, while fresh expectations of rate rises in the US drove bond yields up again last week.
Analysis of Debt Management Office (DMO) data by The Times showed the average yield on UK gilts of different durations sold to investors this year close to levels last seen in 1998.
Gilts are issued by the DMO over a range of different time periods, ranging from short-dated bonds under five years to long-term borrowing over 30 years, at different interest rates.
The yield on 30-year gilts is currently 5.78 per cent, which is the highest level since 1998. The yield on 10-year gilts is 5.14 per cent, which has only been surpassed briefly on three occasions since 1998.
The amount of debt being issued by the UK is exacerbating the problem of higher rates.
An annual report from the DMO published in late August revealing the UK had £303.7billion of planned gilt sales in the last financial year.
This was double the amount in 2016 and the second highest level on record. The DMO said it was exceeded only by its need to finance the government response to the Covid-19 pandemic in 2020 to 2021.
In 2025 to 2026 the UK spent around £109billion on debt interest, according to a House of Commons report, equivalent to about 3.6 per cent of GDP and 8 per cent of total public spending. This is near the highest level in 50 years.
The Prime Minister and Chancellor will lay out their economic plan for Britain against a backdrop of rising government borrowing and mounting inflationary pressure.
The rate the UK must pay investors to buy debt has risen sharply (red line) at the same time as the amount borrowed each year (grey bars) has climbed and was only outstripped in Covid
Mr Healey attended his first G20 summit, in the US state of North Carolina, yesterday and called on his international counterparts to co-operate on tackling energy prices and the cost of living.
He said: 'Britain faces these global pressures from a position of relative strength, the fastest growth in the G7 advanced nations in the first half of this year, the deficit being cut faster than in any other G7 country.
'But no country can face these pressures alone. And these shocks are being felt worldwide. They've been felt in people's pockets, in their weekly shops, filling up their cars.'
Figures published by the Office for National Statistics (ONS) last week showed a surprise jump in government borrowing in July to £1.8billion. This was £700million more than a year ago, with the ONS reporting the government had spent £2billion more on welfare than a year ago.
The Office for Budget Responsibility (OBR) had forecast a £500million surplus in July, which is usually a bumper month for tax receipts thanks to self-assessment payments. This meant government borrowing was £2.3billion higher than forecast.
Borrowing of £56.7billion over the financial year so far is running ahead of the OBR's forecast of £54.4billion.
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Mr Healey has pledged to meet the fiscal rules set by his predecessor Rachel Reeves but Mr Burnham has splashed out on a blitz of measures to ease the cost-of-living since he arrived in Number 10 over summer.
This leaves the Chancellor with a headache as he seeks to balance welfare costs and the need to raise defence spending, with keeping a lid on borrowing.
Figures released today revealed UK shop price inflation was at the highest level for two years last month.
The British Retail Consortium (BRC)-NIQ figures showed shop prices are 1.5 per cent higher than a year ago, a significant jump on the rise of 0.9 per cent reported in July. The increase represents the sharpest rise since February 2024.
Helen Dickinson, chief executive of the BRC, said: 'The impact of higher energy, input and commodity costs is beginning to filter through into prices, particularly for ambient foods which are typically imported and processed.
'In non-food, electrical prices rose amid the ongoing AI boom, which is forcing up the price of memory chips and storage.'