But the borrowing profile in subsequent years is more variable than we (and seemingly the market) had expected: an enormous increase in borrowing in the 2021-22 fiscal year, with PSNB revised up by a staggering £70 billion, to £234 billion (from £164 billion), followed by a more rapid reduction in projected deficits as tax rises take effect.
Rising longer-dated gilt yields combined with the prospect of far more near-term public sector borrowing have led to concerns around rising borrowing costs over the medium-term – for both the UK government and corporates. Indeed, the recent rise in 10-year and 30-year bond yields serves as a reminder of the heightened sensitivity of the government’s debt-servicing costs to higher interest rates. The OBR estimates that a 1% rise in short and long-term interest rates would increase the government’s debt interest spending costs by £20.8 billion (0.8% of GDP) in 2025-26. To put that figure in context, it is roughly equivalent to two-thirds of the projected medium-term fiscal tightening.
Putting to one side any market concerns over increased borrowing materialising more quickly than (largely back-dated) tax revenues, we think the substantial increase in gilt supply will increase pressure on the Bank of England (BoE) to provide some response to the upward march of yields – and therefore we don’t think it’s likely we’ll see significantly higher borrowing costs any time soon.