The Chancellor, Rachel Reeves, has pledged that all day-to-day spending should be funded from taxes, not from borrowing.
But if she needs more money to pay back higher borrowing costs, that uses up more tax revenue, leaving less money to spend on other things.
Economists have warned that this could mean spending cuts which would affect public services, and tax rises that could hit people’s pay or businesses’ ability to grow and hire more people.
The government has committed to having only one fiscal event a year, where it can raise taxes, and this is not expected until the autumn.
So if higher borrowing costs persist, we may be more likely to see cuts to spending before that.
Some people may be wondering about the impact of higher gilt yields on the mortgage market, particularly after what happened after Liz Truss’s mini-Budget in September 2022.
Although yields are higher now than they were then, they have been creeping up slowly over a period of months, whereas in 2022 they shot up over a couple of days. That speedy rise led to lenders quickly pulling deals while they tried to work out what interest rate to charge.
Analysts and brokers say the current unease in the markets is having some effect on the pricing of mortgages. Many were expecting to see some falls in rates at the start of the year but instead lenders are holding off from cuts to see what happens.
However, the market is favourable to anyone currently buying an annuity – a retirement income for the rest of their life, bought only once.
One annuity expert told the many people would get a better deal now than at any time since 2008.
