Can the UK escape the public debt trap?

11 Sep 2026 11:43 AM

EXPERT COMMENT

The UK’s mix of high fiscal deficits, rising bond yields, anaemic growth, high taxes and an impatient electorate can only be solved with politically brave choices.

All major advanced economies have seen rising long-term bond yields over the past year. But with the ten-year gilt yield at 5.2 per cent on 9 Sept 2026, the UK’s long-term rates are the highest in the G7. US ten-year yields are 4.8 per cent, Germany’s are 3.4 per cent and Japan’s 2.9 per cent.

Reasons for the UK’s relative weakness  

The UK’s relatively high long-term interest rate reflects in part its lack of other economies’ advantages. Sterling does not enjoy the US dollar’s global reserve asset role. Gilts do not benefit from the strong home country preference of Japanese investors. And the UK does not have the financial and economic backstop embodied in EU membership. 

But the main factor is most likely to be the UK’s relative economic weakness, leading to higher expected inflation and/or a higher real interest rate risk premium. Financial markets look at the UK and see a country boxed in with structurally low growth, mounting social and defence spending needs, and a tax take which is already at historically high levels. They believe this, combined with fraught domestic politics, makes the UK government more likely than others to try and escape its predicament by borrowing more to boost spending. 

The problem is not just the prospect of additional borrowing. It’s the fact that it would take place at a time when the UK’s debt/GDP ratio is already at an historically high level of over 100 per cent of GDP. 

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