Government borrowing costs have reached a level not seen since 2008, public finance data has revealed, as the UK’s monthly borrowing reached the second-highest February level on record last month.
The Office for National Statistics (ONS) reported that public sector borrowing hit £14.3 billion in February, marking a £2.2 billion increase from the previous year and almost doubling the £7.4 billion projection made by the Office for Budget Responsibility (OBR) last November.
This figure defied economists' expectations, who had largely anticipated borrowing to be around £8.8 billion for the month.
Despite this monthly surge, borrowing for the first 11 months of the financial year, up to March, stood at £125.9 billion. This represents an £11.9 billion reduction compared to the same period last year and is £1.9 billion below the OBR’s November forecast of £127.8 billion.
However, government borrowing costs have also hit their highest level since the 2008 financial crisis as worse-than-expected public finance data compounded a gilt sell-off on worries over soaring inflation and rising interest rates arising from conflict in the Middle East.
Yields on 10-year UK government bonds, also known as gilts, surged above 4.9 per cent at one stage on Friday, up from 4.78 per cent on Thursday, hitting an 18-year high.
Gilts are essentially loans that investors make to the UK government. When the government needs to borrow money, it issues these bonds, promising to pay interest over a set period and return the original amount at the end.
They are considered relatively low-risk investments because they are backed by the government, which is expected to repay its debts.
The ‘yield’ on a gilt refers to the return an investor earns from holding it. This can change depending on how much the bond costs to buy in the market. When demand for gilts falls, their prices drop, and as a result, yields rise – meaning the government has to offer higher returns to attract investors.
Two-year gilts were also rose to 4.52 per cent on Friday after reaching their highest since January 2025 on Thursday in the worst one-day sell off for the short-dated bonds since the mini-budget market chaos in 2022.
The Bank of England held interest rates on Thursday and warned over sharply higher inflation that raised the spectre of possible rate hikes if the war and energy price shock is prolonged.
This had already sent gilt yields racing higher, with the latest public finance statistics adding to the woes and compounding the headache for chancellor Rachel Reeves as it sent borrowing costs rising.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said: “We estimate that increases in gilt yields will cut the Chancellor’s headroom by £7.1 billion in 2030/31, if sustained at current levels.”
“The Chancellor will again have to make difficult decisions in the autumn budget unless hostilities end quickly and energy prices subside,” he warned.
Government borrowing in February was pushed up by £13 billion of debt interest payments – £5.5 billion up on a year ago – due to increases in Retail Prices Index (RPI) inflation impacting index-linked gilts and the timing of debt interest payments from January that fell into last month.
James Murray, Chief Secretary to the Treasury, said: “Because of the choices we made before the conflict in the Middle East began, we are better prepared for a more volatile world.
“We doubled our headroom and borrowing was forecast to be lower than the G7 average.”
