Why UK Borrowing Costs Are Exploding — And Who’s Profiting

SUMMARY

Richard Murphy, political economist and author, analyzes the sharp rise in UK government borrowing costs, arguing that financial institutions and the City of London are driving these increases to protect wealth. He details the ownership of UK government debt, the distribution of interest payments, and proposes policy alternatives to reclaim government control over interest rates and reduce wealth inequality.

MAIN POINTS

• UK borrowing costs have risen above 5%, outpacing France and Italy, with official statistics on GDP and debt figures being misleading. [1:00]
• A third of UK debt is owned by overseas investors, while UK banks, financial institutions, and the Bank of England collectively hold over 45%. [5:01]
• Interest payments on government debt overwhelmingly benefit financial institutions and the wealthiest households, with ordinary people receiving less than 1%. [8:02]
• Bond markets and UK banks manipulate borrowing costs, resulting in higher interest rates that transfer more public money to the wealthy. [12:02]
• Policy alternatives include reclaiming control of interest rates, reducing payments on central bank reserves, and refusing to be held hostage by the City of London. [15:01]
• Murphy calls for a new government to prioritize public needs over financial sector demands and take decisive action on interest rate policy. [19:01]

DETAILED ANALYSIS

UK government borrowing costs have recently surged, with 10-year bonds exceeding 5% and 30-year bonds approaching 5.75%. This is notably higher than comparable European economies such as France and Italy, whose borrowing costs remain below 4%. The discrepancy cannot be explained by economic fundamentals, as the UK maintains its own currency, a central bank, and a long-standing record of never defaulting on its debt.

Instead, the rise in borrowing costs is attributed to the actions of financial markets, particularly in response to the prospect of a new left-leaning government, and the influence of the City of London.

Official statistics on UK GDP and national debt are criticized for being misleading. For example, the inclusion of imputed rent for homeowners inflates GDP figures, while the national debt is overstated by counting internal debts, such as those held by the Debt Management Office itself. The most reliable estimate places the real national debt at approximately £2.7 trillion.

Ownership of this debt is highly concentrated: about one-third is held by overseas investors, reflecting international confidence in the UK’s economic stability and the global role of sterling. The Bank of England, which is government-owned, holds around 18.5% of the debt, but this is effectively mirrored by commercial bank reserves created through quantitative easing. UK banks and financial institutions directly own 27%, and when combined with their reserves, they control over 45% of the total debt.

Insurance companies and pension funds hold a further 21%, underlining the dependence of these sectors on government bonds to meet their long-term obligations.

The distribution of interest payments on this debt reveals a significant transfer of public funds to the financial sector and wealthy individuals. In the 2025–26 fiscal year, the UK government is expected to pay approximately £111 billion in interest, nearly 10% of total government spending. Of this, £37 billion goes to overseas holders, £23 billion to pension funds and insurance companies, and nearly £50 billion to banks and financial institutions.

Less than 1% of government debt is directly owned by ordinary households. The top 10% of wealth holders, who also dominate high-income brackets, receive the vast majority of these interest payments, amounting to around £48 billion annually. In contrast, the bottom 70% of the population benefit minimally from this system.

This structure creates a persistent transfer of wealth from the public to the already wealthy, with government policy and market mechanisms reinforcing this dynamic. When the government proposes measures to support ordinary citizens, financial institutions often respond by selling government bonds, which depresses bond prices and raises effective interest rates. This process, dominated by UK banks, ensures that any attempt to alleviate poverty or increase public spending results in higher borrowing costs and greater income for the financial sector.

The Bank of England maintains high interest rates, exceeding those in the EU, to attract global capital and sustain the City of London’s role as a financial hub and tax haven.

Policy alternatives exist to counter this trend. The government could reclaim control over interest rates from the Bank of England, lower the base rate, and reduce or restructure interest payments on central bank reserve accounts, as practiced in Japan and the EU. Additionally, the government could refuse to issue new bonds when faced with market manipulation, instead borrowing directly from the Bank of England at zero or minimal interest, a practice that was common before 2006 and briefly revived during the COVID-19 crisis.

These steps would diminish the financial sector’s leverage over public policy and redirect resources toward addressing poverty and public needs. The current arrangement is presented as a political choice rather than an economic necessity, and a new government is urged to assert control over monetary policy in the public interest.

LINKS

• Official transcript and Richard Murphy's Funding the Future blog.
• ChatGPT prompt and instructions for writing to your MP about UK borrowing costs.
• Donation page to support Richard Murphy's work.
• Richard Murphy's Bluesky social profile.
• Richard Murphy's blog with further economic analysis.
• YouTube poll related to the video discussion.
• The Wealth Series playlist on YouTube.
• Ecenomics playlist on YouTube.
• Britain playlist on YouTube.
• Tax playlist on YouTube.
• MMT playlist on YouTube.
• Money playlist on YouTube.
• Climate Change playlist on YouTube.
• USA playlist on YouTube.
• Labour playlist on YouTube.
• The Trump Administration playlist on YouTube.
• Introduction video for Richard Murphy's channel.

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