The British pound has dropped to its lowest level in over a year, while UK borrowing costs have surged to their highest levels in 16 years, sparking concerns among economists about the country’s economic outlook.
On Thursday, the pound fell by 0.9%, trading at $1.226 against the dollar, marking its lowest point since 2023. This decline comes as UK borrowing costs spiked earlier in the day before settling down by the afternoon. Economists suggest that while borrowing costs typically lead to a rise in sterling, broader concerns about the strength of the UK economy have contributed to the pound’s slide.
Rising borrowing costs are seen as a sign of increased debt levels and the higher interest the government must pay on its debt. The UK government, which historically borrows to fund its spending, may be forced to raise taxes or implement spending cuts to meet its self-imposed rule of not borrowing for day-to-day expenses.
Treasury minister Darren Jones, responding to an urgent question in the House of Commons, downplayed concerns, stating there was “no need for an emergency intervention” and that financial markets “continue to function in an orderly way.” However, the opposition’s shadow chancellor, Mel Stride, expressed greater concern, saying, “Higher debt and lower growth are understandably now causing real concerns among the public, businesses, and in the markets.”
Jones reiterated that fluctuations in the prices and yields of UK government bonds, known as gilts, were common when global financial markets were impacted by economic data. He also reaffirmed the government’s position that borrowing would be restricted to investments, which he called “non-negotiable.”
Despite this, Stride argued that the government’s increased borrowing would only lead to tax rises being “swallowed up by the higher borrowing costs,” resulting in no tangible benefit for the British public.
Mohamed El-Erian, chief economic adviser at Allianz, warned on the BBC’s Today program that the rise in borrowing costs would eat into tax revenues, leaving less money for public services. He also noted that higher borrowing costs could slow economic growth, further diminishing revenue and leading to more pressure on the government to either raise taxes or reduce public spending.
As the UK grapples with the economic consequences of its rising debt, both the government and the public will likely feel the effects of the financial strain in the months ahead. With concerns growing about the sustainability of the country’s fiscal policies, the government’s next moves will be crucial in shaping the future economic landscape.
