Borrowing costs in the UK are rising after major tax rises were announced in the Budget

LONDON – Borrowing costs in the United Kingdom hit their highest level since Labor came to power on Wednesday after Finance Minister Rachel Reeves unveiled a major package of tax rises in her first budget.

The yield 10-year British government bonds In the hours following Reeves' announcements from 12:30 p.m., the value rose as much as 7 basis points, marking the highest level since she took office in early July. The yield had cooled to a 3 basis point increase to 4.35% by 4pm UK time (12pm ET).

The yield 2 year bondsKnown as gilts in the UK, rose over 6 basis points to 4.33%, after rising as much as 10 basis points.

Yields move inversely to prices, so a higher yield is generally viewed as a sign of higher perceived risk for investors.

The budget included 40 billion pounds ($52 billion) worth of tax rises to plug a hole in public finances – with Reeves pledging to target a daily spending surplus – and enable greater investment in public services.

The Treasury separately said it would increase government bond issuance by 22.2 billion pounds ($28.9 billion) to 299.9 billion pounds in the fiscal year to meet its net funding needs.

The gilt market has remained relatively stable compared to previous turmoil in recent years.

Under former Prime Minister Liz Truss of the Conservative Party, yields jumped in September 2022 after she announced billions of dollars in unfunded tax cuts. The market moves were so severe that they threatened to destabilize Britain's pension funds and required emergency intervention from the Bank of England, forcing Truss to reverse most of the changes and resign within weeks.

Analysts had said ahead of the October 2024 Budget that such volatility was unlikely to repeat for various reasons. This included the fact that many important policies had already been announced and that any increase in borrowing would be used to finance public investments.

Most importantly, inflation in the UK has fallen sharply since the Truss era. The most recent figure was 1.7%, compared to 10.1% during Truss's tenure.

“We think investors are likely to be more tolerant of looser fiscal policy now that inflation has fallen back to the Bank of England's inflation target of 2% and interest rates are likely to trend lower,” said Joe Maher, associate economist at Capital Economics in a note on Monday.

Sanjay Raja, chief UK economist at Deutsche Bank Research, said Reeves' Budget “heralded a significant shift in fiscal policy”, with spending on public services rising by £50 billion by the end of the decade and capital spending rising by another pound 20 billion.

“Ultimately, markets will have to deal with increased borrowing… At the moment, markets remain broadly confident in the Chancellor's plans. But today's budget suggests significantly more government spending compared to earlier expectations,” Raja said.

“While the Chancellor is seeking a rebalancing of the budget framework today, scope remains an issue… With pressure on public spending likely to only increase from now on, the Chancellor will be walking a fine line between even further tax rises and/or cuts “transform.” spending to ensure it doesn’t violate its revamped tax code.

Correction: The headline has been updated to clarify that the government increased taxes in Wednesday's budget.