City readies up for Labour’s borrowing spree
Fixed income investors are readying for the Debt Management Office (DMO) to boost its gilt issuance for the current financial year, otherwise the level of UK government debt sold to traders, as the Labour government ploughs ahead with its borrowing spree.
The DMO, an independent government body that oversees the sale of UK government bonds, known as gilts, is expected to announce extra issuance of around £10bn this year, a revision up from its near £300bn estimate, according to JP Morgan strategists.
The Wall Street bank has also pencilled in around £260bn in gilt issuance for 2026/27 as Labour’s borrowing spree continues to bite on public finances.
The body will confirm its issuance estimates around an hour after the Budget statement is delivered in the House of Commons.
Investors have become more worried about the government’s economic flip-flopping over the last year after Rachel Reeves failed to persuade Labour backbenchers to back her £5bn welfare savings.
On the morning of the Budget, 10-year and 30-year gilt yields, which contributes to determining the government’s borrowing costs, inched up.
Fears over Labour’s borrowing spree
A key projection in the Office for Budget Responsibility (OBR)’s fiscal forecast to be published alongside Reeves’ fiscal plans will be projections for debt interest payments to the government’s lenders.
At the Spring Statement, the OBR said debt interest payments would total around £110bn this year, nearing the amount the government spends on education each year.
Higher payments have come as the Office for National Statistics (ONS) said total borrowing in the current financial year had already hit £116.8bn, nearly £10bn higher than the figure forecast by the Office for Budget Responsibility (OBR).
City analysts have said that investors will be worried about the supply of gilts increasing further in the coming years due to Keir Starmer’s leadership struggles amid discontent in the Labour Party about spending plans.
“The government’s backtracking since the spring provides little evidence that it can follow through on tough fiscal decisions
“Greater than usual uncertainty about the fiscal plans, and the substantial market repricing already, leave us a little cautious,” Elliott Jordan-Doak, an economist at Pantheon Macroeconomics, said.
Jordan-Doak added that the economics consultancy was a “little cautious” about how markets would interpret tax and spending numbers to come in the Budget.
Reeves urged not to ‘game fiscal rules’
ING strategist Frantisek Taborsky said that political battles in Westminster were a “major risk”.
“Pretty much whatever happens, the UK’s deficit and gilt issuance will fall in 2026, owing to the freeze in tax brackets,” Taborsky said.
“Any sign that political pressure is building on Chancellor Reeves could prompt a renewed sell-off in gilts, if investors begin to price in the possibility of a more pro-borrowing successor.”
Panmure Liberum economist Simon French said it was crucial that the Prime Minister declared his “full-throated support” for the Chancellor’s economic plans at the Budget to show that fiscal plans could stick despite some tensions in the Labour Party.
French also urged the government to bring some of its tax and spending measures forward to ease concerns in bond markets, adding that there was some risk that the Chancellor “games her fiscal rules by back-end loading the tough fiscal medicine” in her Budget.
“This was a trick employed by her Conservative predecessors and gilt investors are increasingly wise to fiscal promises too far into the future, and inevitably implemented towards the end of a parliamentary term.
“Telling the OBR of fiscal policy intent is different from convincing financial markets that those measures will be eventually implemented. A balance of fiscal contraction over the next two fiscal years, as well as in the key year – 2029/30 – will be key for credibility.”