What do Rising Government Borrowing Costs Mean for Your Business?
In January, it was announced that the cost of the government’s long-term borrowing had hit the highest level since 1998. The amount of interest paid on national debt – the total amount the government owes – was £8.3 billion in December 2024, £3.8 billon more than in December 2023.
In addition, the gap between government spending and tax revenue widened to £17.8 billion in December, compared with £10.1 billion a year earlier, and higher than the £14.6 billion forecast by Office for Budget Responsibility (OBR).
On the heels of that, in February 2025, the Bank of England cut interest rates to 4.5% from 4.75% and halved its growth forecast for 2025 to 0.75%. The Bank also warned there were a number of factors that could affect inflation, including higher energy and water bills, and possible trade tariffs in the US. Inflation is expected to rise to 3.7% and not to fall back to its 2% target until the end of 2027.
While interest rates have been reduced slightly, they are still far higher than prior to 2021, when the Bank began raising them. Slower growth means less tax revenue and a higher debt-to-GDP ratio. A quarter of the UK government’s debt is index-linked, so the cost of servicing it is directly tied to inflation.
The Domino Effect
Those issues inevitably have an impact on those of us further down the line. High borrowing costs affect businesses seeking finance, so if this is something your business relies on, or you have plans in the pipeline that will mean you want to borrow, you can expect to pay more for the privilege. For more information here is a link to our website with credit tools that will help you keep control or get in touch with our team.
The government has been trumpeting cuts for some time. With a reduced capacity for spending, things like public services, infrastructure projects and support schemes – including business support schemes – could be affected. Depending on the nature of your business, this could impact you directly.
Higher costs for things like water and energy will obviously have an impact on budgets.
If the United Stages of America (US) imposes tariffs on the United Kingdom (UK), that could disrupt exports to the US. Goods would become more expensive for US customers, who might seek alternative suppliers.
In addition, higher US interest rates resulting from these tariffs could negatively affect UK borrowing markets and potentially result in higher inflation. These imposed tariffs could negatively impact the UK – for example, the National Institute of Economic and Social Research (NIESR) estimates that if the US does impose 25% tariffs on Mexico and Canada, as threatened, that could reduce UK GDP growth by 0.1 percentage points in 2025.
Staying Ahead of the Curve
There are steps you can take to stay ahead of the curve. A first step might be to look at ways you can reduce costs while maintaining quality and customer satisfaction.
Where possible, build and maintain a healthy cash reserve to use as a buffer against the vagaries of the economy.
It might be prudent to review your financial strategies and take stock of where you stand. Supposing you have existing debt, it might be worth refinancing and securing a lower interest rate. You could also look at ways of reducing dependency on traditional borrowing by, for example, inviting equity investment.
Stay on top of government actions. The pressure on the Chancellor might result in actions being taken in the Spring Budget – scheduled for 26 March 2025 – that bring good news and relief for businesses. Also, as the government are pushing growth as a key aim, measures that help business growth might be introduced.
The Way Forward
A two-pronged approach – be informed, be flexible – would seem to promise the best outcomes. Things are undoubtedly unsettled and potentially challenging, and most of these big picture issues are things over which we have no direct control.
However, what we do have control over is how we respond, and keeping on top of information while taking a proactive and nimble approach is likely to help us weather uncertainties and spot opportunities.
If you would appreciate help with reviewing your financial strategies or positioning for growth, please get in touch. Give our team a call on 01733 371180.