UK faces highest borrowing costs in wealthy OECD nations, says think tank

The UK now has the highest borrowing costs of any wealthy Organisation for Economic Co-operation and Development (OECD) country, primarily due to persistent inflation and its vulnerability to shifts in international investor sentiment, according to the Resolution Foundation.

In a report, the think tank revealed that the UK’s 10-year government borrowing costs have surged to the highest level among all OECD nations. This increase has led to a dramatic rise in debt-servicing costs, which have quadrupled to £105bn annually since 2020-21.

Projections suggest that the additional borrowing costs since the last Office for Budget Responsibility (OBR) forecast in early 2025 could add around £4bn to the projected borrowing in 2029-30 if trends persist.

The report highlights "sticky" inflation as the main driver of the UK’s high borrowing costs. With inflation currently at 3.8%, the highest in the G7, expectations for policy-rate hikes have also climbed. In contrast, inflation expectations in the US and the eurozone are lower, at 3.3% and 2%, respectively.

Another factor contributing to the UK’s borrowing premiums is the sensitivity of gilt yields to changes in global investor sentiment. This reflects the country’s reliance on foreign investors, coupled with concerns over the stability of the UK public finances. The report warns that any further destabilising volatility, domestically or globally, could increase UK borrowing costs.

Additionally, the think tank pointed to the Bank of England’s (BoE) ongoing Quantitative Tightening (QT) programme as a contributor to rising gilt yields. Since 2022, the BoE has been reducing its holdings of government debt at a rate of £100bn annually.

James Smith, research director at the Resolution Foundation, said: “The UK currently has the highest borrowing costs among rich countries, which is adding to the chancellor’s acute fiscal headache as she prepares for her budget.

“These exceptionally high borrowing costs are not being driven by relatively high levels of debt, where the UK is in a better position than the US or France. Instead, it is being driven by sticky inflation and the UK’s reliance on foreign investors.

Read more: Bank of England cuts gilt holdings by £32.5bn in second quarter

“Policy makers can and should do more to bring these borrowing costs down."

The think tank suggests that chancellor Rachel Reeves should consider increasing the margin of fiscal flexibility in her upcoming budget beyond the current £9.9bn headroom against fiscal rules. Measures should aim to ease cost of living pressures without exacerbating inflation.

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The think tank also recommends that the Bank of England slow the pace of its QT programme. Additionally, the Debt Management Office should continue to reduce the issuance of long-term gilts, where yields are especially high.

Smith said: "The chancellor should use her budget to strengthen Britain’s fiscal position and avoid stoking inflation. The Bank can also help by slowing its sales of gilts in line with achieving the inflation target.”

The autumn budget will be delivered in parliament on 26 November.

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