London Daily

Focus on the big picture.
Thursday, Oct 22, 2026

Government borrowing costs rise after PM's U-turn

Government borrowing costs rise after PM's U-turn

Government borrowing costs rose on Friday afternoon after the prime minister announced another U-turn on the mini-budget.

The pound, which initially held firm earlier on Friday, also lost ground.

The moves came as Liz Truss sacked her chancellor, Kwasi Kwarteng, and said a rise in corporation tax would now go ahead.

However, some economists warned that the latest developments might not be enough to restore the UK's credibility.

"It's unlikely that the removal of Kwasi Kwarteng as chancellor and the new plans to cancel the cancellation of the rise in corporation tax from 19% to 25% from next April will be enough on their own to regain the full confidence of the financial markets," said Paul Dales, Chief UK economist at Capital Economics.

He also pointed out that despite another U-turn on the 45p tax cut, there are still unfunded tax cuts of about £25bn left over from the mini-budget - down from £45bn originally.

The cost of government borrowing rose across a range of bonds traded on the financial markets following the announcement.

The interest rate - or yield - on bonds due to be repaid in 30 years' time climbed to 4.85%.

They had hit 5.17% on 28 September in the aftermath of the mini-budget when Mr Kwarteng set out one of the biggest tax cuts packages seen in decades but did not explain how they would be funded.

Meanwhile, the yield on bonds due to be repaid in five years' time, which underpins the cost of new five-year fixed rate mortgages, jumped to 4.35%.

The pound - which had jumped on Thursday as speculation mounted about a possible U-turn - also sank by more than 1% to just under $1.12 on Friday before clawing back some losses.

Prime Minister Liz Truss admitted the government's mini-budget had gone "faster and further" than many expected.

"We need to act now to reassure the markets of our fiscal discipline," she said.

The government also announced that Jeremy Hunt, the former foreign and health secretary, will succeed Mr Kwarteng. He will be the UK's fourth chancellor so far this year and will face big challenges with prices soaring and hikes in interest rates.

Speaking to the BBC's economics editor Faisal Islam, leading economist Mohamed El-Arian said that the events seen in the UK over the last few weeks in particular were "unthinkable".

"There are already scars. If you had to refinance your mortgage, if you're looking to buy a house - you've been hit," he said of the recent market turmoil.

He said Mr Hunt "needs more measures, he needs to cover more of the unfunded tax cuts that were introduced… most of the damage is recoverable but it needs action and time".

Jeremy Hunt steps in as chancellor at a crucial time for the UK economy


Investec economist Ellie Henderson described markets as "dizzy" over the series of policy reversals and changes.

"Markets seem unconvinced that today's announcement was enough to fully restore confidence in the UK government," she said.

The government had already U-turned on its plan to scrap the top rate of income tax for people earning £150,000 a year or more. Reducing the tax rate for top earners would have cost £2bn.

Moving ahead with the increase in corporation tax should add an estimated £18bn a year in tax revenue to the government's coffers.

The prime minister added that "spending will grow less rapidly than previously planned".

The Treasury also confirmed that the incoming chancellor would still deliver the government's "economic plan" on 31 October, which will set out how the remaining tax cuts will be funded, and how debts will be reduced.

On Friday, an emergency bond-buying scheme set up by the Bank of England to restore calm in the financial markets following the previous mini-budget will also come to an end.

The government raises money it needs for spending by selling bonds - a form of debt that is paid back plus interest in anywhere between five and 30 years.

Pension funds invest in bonds because they provide a low but usually reliable return over a long period of time.

However, the sharp fall in their value after the mini-budget forced pension funds to sell bonds, threatening to create a "downward spiral" in their prices as more were offloaded, which left some funds close to collapse.

This sparked an emergency intervention by the Bank of England, which has stepped in to buy £19.3bn worth of government bonds.

There has been strong speculation that the Bank will extend the scheme past the Friday deadline.

But on Tuesday, the Bank's governor Andrew Bailey dashed those hopes, telling pension funds: "You've got three days left now and you've got to sort it out."

Bethany Payne, global bonds fund manager at Janus Henderson, told the BBC it was not clear whether pension funds have done enough to strengthen their finances.

"The risk is that we don't know how pension funds have used this window of time and whether they have used it effectively by raising cash and doing everything they need to," she said.

"So the true test of the market will be this afternoon and Monday morning to see whether they have done enough."

Newsletter

Related Articles

0:00
0:00
Close
Parliamentary Inquiry Highlights Urgent Need to Address Housing Shortage as Scottish Completions Hit Eleven-Year Low
United Kingdom and Singapore Sign Comprehensive Financial Agreement to Deepen Digital and Sustainable Market Ties
Greggs Announces Plan to Close Four Manufacturing Facilities and Cut Seven Hundred and Forty Jobs
International Monetary Fund Raises United Kingdom Economic Growth Forecast While Warning of Inflationary Pressures
Energy Security and Net Zero Committee Urges Government to Shift Policy Costs Onto Gas to Lower Household Bills
Housebuilding Across Scotland Plummets to Eleven-Year Low Despite Government Pledges to Tackle National Housing Emergency
Greggs Announces Factory Closures Across Northern England and Scotland Affecting Seven Hundred Forty Jobs
United Kingdom and Singapore Conclude Eleventh Financial Dialogue in Singapore to Deepen Cooperation on Digital Finance and Capital Markets
Energy Security and Net Zero Committee Urges Government to Shift Policy Costs to Gas Bills and Tap Windfall Profits to Lower Consumer Prices
British Broadcasting Corporation Announces Major Cost-Cutting Overhaul to Close Linear Broadcast Services for Television Channels BBC Three and BBC Scotland Alongside Digital Radio Station BBC Radio Four Extra
London Capital Markets Face Renewed Scrutiny After High-Profile Offerings Underperform Post-Listing
Green Party Wins Historic First Westminster Parliamentary By-Election in Gorton and Denton
Environment Secretary Emma Reynolds Unveils Sweeping Regulatory Overhaul for English Water Industry
United Kingdom Health Security Agency Confirms Thirty-Four Cases in Kent Meningitis Outbreak
Ministry of Defence Prepares Heat Pump Subsidy Cuts to Fund Urgent Military Modernization
British and European Union Officials Schedule Long-Awaited Bilateral Leaders Summit for November Twentieth
Bank of England Governor Andrew Bailey Urges Strict Fiscal Credibility to Protect British Bond Markets
United Kingdom Inflation Rises to Three Point One Percent Driven by Escalating Fuel Costs
Profit Warnings Among London-Listed Companies Reach Two-Year High Amid Global Energy Shocks
Chancellor John Healey Signals Targeted Tax Changes on Banks and London Corporate Offices Ahead of Budget
British Government Reallocates Twenty-Five Per Cent of International Climate Finance to Global Biodiversity Projects
Initial British Carbon Border Taxes Set to Undercut Parallel European Union Tariffs on Industrial Imports
Whitehall Prepares National Zero-Interest Loan Initiative to Accelerate Domestic Heat Pump and Solar Adoption
European Union Offers British Automakers Access to Hybrid Vehicle Trade Protections Subject to Strict Regulatory Alignment
British Probation Officers Threaten Widespread Industrial Action After Rejecting Five Per Cent Government Pay Offer
Microsoft Abandons Major British Artificial Intelligence Data Centre Citing Severe National Grid Power Constraints
United Kingdom Inflation Accelerates to Three Point Four Per Cent Ahead of Chancellor John Healey's Inaugural Autumn Budget
Surging Cloned Number Plates Severely Complicate Traffic Enforcement and Police Investigations
Mounting Opposition Challenges Planned Rollout of Autonomous Taxis Across London
Influential Think Tank Urges Rejoining European Union to Navigate Geopolitical Crises
Government Review Recommends Slashing Benefits to Fund Youth Employment Initiatives
Senior Minister Shabana Mahmood Seeks New Law Enforcement Pact With European Union
Airbus Executive Warns Britain Risks Losing Crucial Role in European Space Industry
Exorbitant Electricity Costs Push British Steelmakers to Worst Competitive Position in Three Years
British Food and Beverage Exports to European Union Collapse by Over a Third Since Brexit
Up to Twenty English Maternity Units Face Impending Closure Due to Safety and Staffing Crises
Government Declares Severe Drought Across Southern England Following Record Dry Spell
Corporate Profit Warnings Reach Two-Year High Amid Middle East Conflict and Rising Costs
International Monetary Fund Warns Chancellor John Healey Against Proposed Bank Tax Raid
Northern Ireland Secures Favorable Agricultural Export Agreement with European Union
Scottish Government Approves Major Offshore Floating Wind Farm Near Aberdeenshire
High Speed Two Rail Project Faces Three Billion Pound Cost Escalation on Initial Phase
National Health Service Warns of Winter Capacity Crisis Across English Hospitals
Tata Steel Confirms Two Thousand Job Cuts at Port Talbot to Fund Green Transition
Global Microchip Developer Announces Three Billion Pound Semiconductor Plant in Cambridge
United Kingdom Artificial Intelligence Safety Institute Proposes Mandatory Licensing for Generative Models
United Kingdom Commits Additional Long-Range Weapons and Air Defenses to Ukraine
British Chancellor Overhauls Infrastructure Financing to Bypass Borrowing Constraints
Bank of England Holds Benchmark Interest Rate at Four Point Five Percent
First Minister Rhun ap Iorwerth Confirms Constitutional Discussions Over Welsh Independence During Initial Bilateral Call with Prime Minister
×