London Daily

Focus on the big picture.
Thursday, Oct 02, 2025

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
Trump Administration Launches “TrumpRx” Plan to Enable Direct Drug Sales at Deep Discounts
Trump Announces Intention to Impose 100 Percent Tariff on Foreign-Made Films
Altman Says GPT-5 Already Outpaces Him, Warns AI Could Automate 40% of Work
Singapore and Hong Kong Vie to Dominate Asia’s Rising Gold Trade
Trump Organization Teams with Saudi Developer on $1 Billion Trump Plaza in Jeddah
Manhattan Sees Surge in Office-to-Housing Conversions, Highest Since 2008
Switzerland and U.S. Issue Joint Assurance Against Currency Manipulation
Electronic Arts to Be Taken Private in Historic $55 Billion Buyout
Thomas Jacob Sanford Named as Suspect in Deadly Michigan Church Shooting and Arson
Russian Research Vessel 'Yantar' Tracked Mapping Europe’s Subsea Cables, Raising Security Alarms
New York Man Arrested After On-Air Confession to 2017 Parents’ Murders
U.S. Defense Chief Orders Sudden Summit of Hundreds of Generals and Admirals
Global Cruise Industry Posts Dramatic Comeback with 34.6 Million Passengers in 2024
Trump Claims FBI Planted 274 Agents at Capitol Riot, Citing Unverified Reports
India: Internet Suspended in Bareilly Amid Communal Clashes Between Muslims and Hindus
Supreme Court Extends Freeze on Nearly $5 Billion in U.S. Foreign Aid at Trump’s Request
Archaeologists Recover Statues and Temples from 2,000-Year-Old Sunken City off Alexandria
China Deploys 2,000 Workers to Spain to Build Major EV Battery Factory, Raising European Dependence
Speed Takes Over: How Drive-Through Coffee Chains Are Rewriting U.S. Coffee Culture
U.S. Demands Brussels Scrutinize Digital Rules to Prevent Bias Against American Tech
Ringo Starr Champions Enduring Beatles Legacy While Debuting Las Vegas Art Show
Private Equity’s Fundraising Surge Triggers Concern of European Market Shake-Out
Colombian President Petro Vows to Mobilize Volunteers for Gaza and Joins List of Fighters
FBI Removes Agents Who Kneeled at 2020 Protest, Citing Breach of Professional Conduct
Trump Alleges ‘Triple Sabotage’ at United Nations After Escalator and Teleprompter Failures
Shock in France: 5 Years in Prison for Former President Nicolas Sarkozy
Tokyo’s Jimbōchō Named World’s Coolest Neighbourhood for 2025
European Officials Fear Trump May Shift Blame for Ukraine War onto EU
BNP Paribas Abandons Ban on 'Controversial Weapons' Financing Amid Europe’s Defence Push
Typhoon Ragasa Leaves Trail of Destruction Across East Asia Before Making Landfall in China
The Personality Rights Challenge in India’s AI Era
Big Banks Rebuild in Hong Kong as Deal Volume Surges
Italy Considers Freezing Retirement Age at 67 to Avert Scheduled Hike
Italian City to Impose Tax on Visiting Dogs Starting in 2026
Arnault Denounces Proposed Wealth Tax as Threat to French Economy
Study Finds No Safe Level of Alcohol for Dementia Risk
Denmark Investigates Drone Incursion, Does Not Rule Out Russian Involvement
Lilly CEO Warns UK Is ‘Worst Country in Europe’ for Drug Prices, Pulls Back Investment
Nigel Farage Emerges as Central Force in British Politics with Reform UK Surge
Disney Reinstates ‘Jimmy Kimmel Live!’ after Six-Day Suspension over Charlie Kirk Comments
U.S. Prosecutors Move to Break Up Google’s Advertising Monopoly
Nvidia Pledges Up to $100 Billion Investment in OpenAI to Power Massive AI Data Center Build-Out
U.S. Signals ‘Large and Forceful’ Support for Argentina Amid Market Turmoil
Nvidia and Abu Dhabi’s TII Launch First AI-&-Robotics Lab in the Middle East
Vietnam Faces Up to $25 Billion Export Loss as U.S. Tariffs Bite
Europe Signals Stronger Support for Taiwan at Major Taipei Defence Show
Indonesia Court Upholds Military Law Amid Concerns Over Expanded Civilian Role
Larry Ellison, Michael Dell and Rupert Murdoch Join Trump-Backed Bid to Take Over TikTok
Trump and Musk Reunite Publicly for First Time Since Fallout at Kirk Memorial
Vietnam Closes 86 Million Untouched Bank Accounts Over Biometric ID Rules
×