Rachel Reeves is facing humiliation as borrowing costs soared to higher than they were after Liz Truss’s disastrous mini-Budget.
Economic experts warned the Chancellor was on the verge of breaking her own borrowing rules thanks to her Budget flop.
When she entered No 11, Ms Reeves set a new self-imposed fiscal rule of not borrowing to fund day-to-day government spending.
However, her Budget left her with less than £10billion of fiscal headroom, which economists now say could be closer to just £1billion due to rising debt costs.
The 10-year gilt yield – the amount the Government pays to borrow money for a decade – has now surged to 4.6%.
That is higher than the 4.3% under Ms Truss and her chancellor, Kwasi Kwarteng.
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Rachel Reeves is facing economic humiliation (Image: Getty)
The rise indicates collapsing investor confidence in the UK’s growth prospects and could force the Chancellor to either increase taxes, cut spending, or break her borrowing rules less than a year into the job.
The rising cost of borrowing means the Government has to spend more money servicing the country’s enormous debt, rather than on public services or tax cuts.
On Tuesday, Ruth Gregory and Alex Kerr, from Capital Economics, warned Ms Reeves now faces a “nasty choice”.
They said: “There is a significant chance that the Office for Budget Responsibility will judge that the Chancellor, Rachel Reeves, is on course to miss her main fiscal rule when it revises its forecasts on March 26.
“To maintain fiscal credibility, this may mean that Reeves is forced to tighten fiscal policy further.
“In recent years, the fiscal headroom has never been this low. It would only take a further 0.06 percentage point increase in market expectations and 20-year gilt yields to wipe it out altogether.”
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Borrowing costs are now higher than under Liz Truss (Image: Getty)
A leading broker added that the surge in long-term borrowing costs now means investors are worried about the scale of future budget deficits.
Kathleen Brooks, from XTB, warned this could force Ms Reeves into a “rethink”, which could involve huge cuts to public spending or tax hikes which would kill off growth.
Shadow Business Secretary Andrew Griffith warned: “The fact that gilt rates are at their highest level for 25 years shows investors are voting with their feet and have no faith in Labour’s economic plan.
“The cost of this will be paid by businesses and households in higher and it comes when firms are already reeling from Labour’s jobs tax, biz rates rise and higher costs from the union-inspired Employment Bill.
“The stubborn Chancellor needs to urgently change course.”