In practice, there are only two ways to raise the money: tax more or spend less. Borrowing more might help but risks breaking the self-imposed fiscal framework. None is an easy choice.
Tax more/spend less: From a policy and political standpoint, this is difficult—think of the pledge not to raise taxes on “working people,” or the implications of tighter spending on core services. It’s also growth‑unfriendly and could have negative implications for inflation. For gilts, that can be supportive: slower growth raises the odds of Bank of England cuts being priced in more fully (there’s currently only around 1.5 cuts of 25 basis points over the next year in the UK, versus roughly 4.25 cuts priced in the US). We would then expect yields to move lower, most likely via the front and belly of the curve.
Borrow more: This is the direct challenge for bond markets. Supply and fiscal credibility have already pushed long‑dated yields higher, to the effect that long-term gilts now offer plenty of rolldown*. However, an attempt at substantial levels of borrowing risks adding fuel to the fire. More borrowing could easily push long‑end yields up even further (and potentially the whole curve), particularly if markets read it as a step away from the recently instituted fiscal rules.
A blended approach: A mixed package is probably the most realistic path. Another ‘way out’ would be through higher GDP growth (leading to higher tax revenues) but growth-positive policies often come with some upfront costs so lead back to a combined package. In this case, messaging and credibility become pivotal—how the numbers add up, the composition of the package, and the medium‑term framework will do a lot of the work for (or against) gilts.
