Source Credit : Portfolio Prints
Introduction
The United Kingdom is experiencing a significant surge in government borrowing — one that carries deep implications for businesses, financial markets and the broader economy. In September 2025, government borrowing reached £20.2 billion, its highest amount for a September in over five years. Over the first half of the fiscal year it climbed to £99.8 billion, exceeding forecasts by some £7 billion.
This borrowing boom is not simply a fiscal headline. It ripples through bond markets, currency valuations, business investment decisions, credit conditions and corporate strategies. Below we unpack the drivers, the impacts across business and markets, the risks and the outlook.
What’s driving the borrowing boom?
Several converging factors are underpinning this sharp rise in borrowing:
Weak growth and constrained revenue
Economic growth in the UK has been sluggish, which dampens tax revenue growth (income, corporation taxes) and limits the natural offset to rising spending.
Rising debt-interest and public spending pressures
The cost of servicing the debt is rising. Yields on UK government long-term bonds (gilts) have reached highs not seen since the late 1990s. At the same time, inflation remains sticky, raising welfare and benefit payments, public wages and other spending commitments. For example, the monthly borrowing surge in September was driven by higher debt interest and welfare payments, despite tax receipts rising ~9%.
Forecasts and fiscal headroom shrinking
The borrowing numbers are higher than forecast by the Office for Budget Responsibility (OBR). The April–September borrowing of ~£99.8 billion overshoots the forecast by about £7.2 billion. That means the government’s fiscal “wiggle room” is shrinking ahead of the upcoming budget.
Market reaction and higher yields
Investors are demanding higher yields for UK gilts, reflecting concerns about fiscal sustainability. The 30-year gilt yield hit its highest in a generation. That pushes up borrowing costs further, creating a self-reinforcing loop.
How this is reshaping business and markets
The borrowing surge and its attendant fiscal/market effects are altering the landscape for companies, investors and financial markets in multiple ways.
Financial-markets adjustment
- Bond markets & yields: With UK government borrowing increasing and yields rising, bond markets are getting nervous. The higher yield means higher cost of capital for the government, which can spill into other interest-sensitive sectors.
- Sterling and currency volatility: The UK currency (sterling) has weakened at times as fiscal concerns weigh on investor sentiment.
- Equities and risk premium: For companies listed in the UK, the rising yields mean discount rates go up, which can make future cash flows less valuable and may dampen valuations. Markets are watching the fiscal numbers closely.
Business investment and borrowing conditions
- Cost of borrowing for business: If government yields rise, corporate borrowing costs often follow. For companies already carrying debt, refinancing becomes more expensive. That can reduce investment, slow growth and prompt austerity within firms. For example, some analysis shows high borrowing costs can stifle business investment.
- Competitive pressures: Domestic businesses will be mindful of government fiscal policy (tax hikes, spending cuts) because that affects demand, consumer spending and business confidence. A tighter fiscal environment can translate into slower demand.
- Crowding-out effect: When government absorbs more funds, fewer resources may be available for private investment. If interest rates rise, projects that previously made sense may become marginal. This can hamper productivity growth and long-term corporate strategy.
Sector-specific implications
- Financial services and pension funds: Long-dated gilts are used by pension funds and insurers. With yields rising, valuations of their assets drop and they face liabilities that may grow. This can force them into riskier strategies or reduce willingness to lend.
- Real estate and infrastructure: Higher yield curves make long-term real-asset financing more expensive. Infrastructure projects or commercial real-estate developments may see margins squeezed or may be delayed altogether.
- Exporters and currency-sensitive firms: A weaker pound may help exporters but import-heavy firms will feel cost pressure. Businesses heavily reliant on imported inputs may see margins erode.
Fiscal policy, tax and regulation
With borrowing higher than expected, the government is under pressure to raise taxes or cut spending to bring the numbers back into line. This has direct implications for business: tax hikes (corporate, employer NI, capital gains) or regulatory changes may be on the table. For example, the upcoming budget is widely expected to include tough choices.
The outlook: what to watch
- Upcoming Budget (26 November 2025): Rachel Reeves as Chancellor lies in wait. The budget is expected to bring tax & spending decisions aimed at stabilising the public finances. Markets will scrutinise the plan for credibility.
- Bond yields & gilt issuance: Will the government continue to borrow at favourable maturities and rates, or will yields keep climbing? The cost of borrowing remains a barometer of fiscal health.
- Business capital-markets behaviour: Are companies scaling back investment, delaying projects or seeing higher cost of capital? Corporate finance decisions will reflect the broader borrowing environment.
- Monetary-fiscal interplay: With the Bank of England cautious about rate cuts (despite inflation slightly cooling) and fiscal policy under strain, the interplay will matter.
- Sectoral credit stress: Particularly leveraged firms, infrastructure developers, real-estate firms and those exposed to refinancing risk will be vulnerable if conditions tighten further.
Conclusion
The UK’s borrowing boom is more than a headline number: it is actively reshaping the landscape for business, investors and markets. Rising debt and borrowing costs are tightening the fiscal leash, increasing the cost of capital, raising risk premiums and constraining investment.
For businesses, the message is clear: in a world of higher yields and fiscal caution, investment decisions, financing strategies and cost structures may need to adjust. For investors, the UK is a laboratory of fiscal stress meeting market discipline — and what happens there may offer lessons for other economies.
As the UK heads into its November budget, the key question is whether the authorities can restore credibility and stabilise borrowing without choking off growth. If not, the ripple-effects across business and markets may deepen.
