Britain’s debt problem matters to you

UK borrowing rates, debt levels, and deficit remain elevated 

• UK debt remains near record highs, despite a smaller deficit.
• Borrowing costs remain elevated, even as gilt issuance falls.
• Investors still demand a premium for long-term UK lending.

The UK government spends more than it collects in taxes and other revenues, and because of this, it needs to borrow money to meet the shortfall. The shortfall is known as a deficit, and currently, the UK government has an annual deficit of around £132bn, which is 4.3% of gross domestic product (GDP measures the size of an economy). At the end of May 2026, after years of running an annual deficit, the UK’s public sector net debt had grown to almost £3tn, now amounting to 95% of GDP. The debt is known as gilts, and these are the primary mechanism through which the country finances its deficit. When gilts mature (need paying back), they are typically replaced with new ones, so the government must maintain regular access to investors willing to lend it money. 

Issuance of gilts has grown since 2020, as a result of the pandemic, energy shocks, and rising debt servicing costs. Yields on the government’s debt has reacted by rising sharply, with 10-year yields breaking through 5% on multiple occasions, and 30-year yields moving towards 6%. However, there have recently been some improvement in the government’s 10-year financing position. The fiscal deficit declined from around 5.2% of GDP in FY 2024/25 to approximately 4.3% in FY 2025/26, reducing annual gilt issuance requirements from roughly £300bn to £250bn. At the same time, the UK Debt Management Office (DMO) has shifted issuance away from very long-dated gilts towards shorter maturities, reducing the supply of longer-dated bonds in an effort to lower long-term borrowing rates. 

Both lower issuance and shorter-dated issuance should have been supportive for the gilt market and reduced the upward pressure on yields. Yet the market has not fully reflected these improving fundamentals. Continued elevated gilt yields reflects concerns beyond current borrowing requirements, with investors increasingly focused on political uncertainty and the credibility of future government fiscal policy (tax and spending). Markets are questioning whether governments will continue to adhere to fiscal rules or whether political pressures will lead to additional borrowing, particularly given the weak economic growth and mounting spending demands. The result we are seeing is a higher term premium, meaning investors are demanding greater compensation when lending to the government for long periods. 

The buyer base for gilts has changed significantly 

• The BoE is stepping back, leaving private investors to fund more UK debt.
• Gilt yields directly affect pensions, savings and mortgage rates.
• Higher yields mean higher debt-interest costs and less money for public services.

The Bank of England (BoE) is no longer a large buyer of gilts. Through quantitative easing (to support the economy), the Bank of England accumulated around 34% of the gilt market by 2022, amounting to around £875 bn, but its ownership share has since fallen to around 18% as it allows the bonds it owns to mature, and even actively sells them. The reduction in demand from the BoE means gilt markets are more reliant on attracting private capital, which generally requires higher yields. Overseas investors remain key players, holding roughly one third of the market. Domestically, UK savers and investors make up nearly 40% of gilt ownership, via pension and insurance funds, and ‘other financial institutions’, such as investment managers investing UK public wealth. This means that there is either a direct or indirect impact between gilt prices and the wealth of the UK public, as changes in gilt prices affect the value of pension funds and long-term savings. 

In addition to this, gilt yields form the foundation of UK borrowing costs. When government borrowing costs rise, they influence mortgage rates, unsecured consumer borrowing rates, and the pricing of financial assets across the economy. Higher gilt yields make it more expensive for households to buy homes, for businesses to invest, and for consumers to access credit. This can slow economic growth and dampen employment opportunities. Consequently, movements in the gilt market affect living standards, even for those who have never directly purchased a government bond, and as such, the UK public should be concerned about government fiscal policy and changes to spending. The reduction in demand from the Bank of England means gilt markets are more reliant on attracting private capital, which generally requires higher yields. 

There is also a direct impact on taxpayers. Debt interest spending has become one of the fastest growing components of government expenditure. Every increase in gilt yields eventually raises the cost of servicing the national debt as new bonds are issued. Money spent on debt servicing by the UK taxpayer is money that cannot be spent on health, education, and other social infrastructure. This makes the level of gilt yields relevant to every taxpayer in the country. 

Pressure on gilt yields may ease, but the UK consumer should remain vigilant 

• High yields reflect rates, politics and QT.
• Lower inflation and tighter fiscal discipline could ease yields.
• But high debt keeps the UK vulnerable to higher borrowing costs.

Elevated UK government bond rates are largely as a result of higher policy rates set by the BoE, which remain much higher than during the decade following the Global Financial Crisis (2008/09). Policy rates have increased due to persistent inflation risks, which remain a concern as commodity and energy market disruptions have repeatedly demonstrated the potential for inflation to re-emerge. In addition, political uncertainty surrounding fiscal policy has increased the term premium required by investors for holding longer-dated gilts. Markets remain unconvinced that future governments will fully restrain borrowing, particularly as political pressures to increase spending continue to intensify. 

Finally, the withdrawal of BoE support through quantitative tightening (QT) has removed an important source of demand, contributing to higher yields. 

There are signals that point to a decline in yields going forward. The fiscal deficit is improving, issuance requirements have fallen from recent peaks, and the composition of issuance has shifted towards shorter maturities. At the same time, wage growth and domestic inflation pressures are easing relative to the post-pandemic period, which reduces the likelihood of a sustained inflation shock. Furthermore, banks and insurers continue to provide stable demand for government debt, limiting the risk of a rapid market repricing. If political uncertainty subsides and investors gain confidence that fiscal rules will be respected, risk premia could fall and yields could move lower. 

Despite this, UK debt levels remain close to 100% of GDP, and the market must therefore absorb substantial issuance without the support of a price insensitive central bank buyer. Should governments choose to address weak economic growth by spending more, financed through additional borrowing, investors may continue to demand a substantial term premium. Ultimately, the gilt market is the mechanism through which the government funds itself. Any political party that shows a lack of respect for this funding mechanism will cause negative consequences for households through mortgages, pensions, economic growth and public finances.