Winter Blues for the UK Economy

The UK economy has had a tumultuous start to 2025.

Most notably, 10-year gilt (government-issued bonds) yields reached their highest levels since 2008. As a result of this, borrowing money will be much more expensive for the UK government. This could have sizable repercussions for the country’s public finances and growth prospects with knock on consequences for businesses and universities. Here, we will discuss: 

1. What is going on with the economy?  
2. What are the possible consequences? 
3. What could the government do to alleviate pressures? 

What is going on with the economy?

The biggest news in recent weeks is that the yield (or return) on 10-year gilts reached the highest level since 2008.

10-year gilt yield percent change since Jan. 2024

What does that mean?

When the government needs money, it sells bonds, which it will repay at a fixed level of interest. However, for several weeks, investors have begun selling their bonds en-masse, pushing down bond prices and increasing bond yields.  

Why are so many investors selling their bonds?

There is not one clear answer. Some have argued that it is caused by the incoming Trump Administration in the US. Trump’s tariff plans have caused bond yields to go up in the US, and it is very likely that gilt yields are following suit. There is evidence to this theory, as bond yields have similarly increased in France, Germany, and Japan. 

Others have pointed to the UK’s ongoing macroeconomic struggles. Notably, inflation remains uncomfortably high and growth disappointingly low. Others still blame the Government’s October budget for spooking markets with its tax rises and increased debt. Overall, the UK’s current economic landscape reflects a combination of a challenging fiscal legacy and broader global pressures. 

What are the possible consequences?

Regardless of why investors are selling their bonds (or what level of alarm it should precipitate), we do know that it will result in a higher cost of government borrowing. This comes as the Chancellor has set fiscal rules for herself which mandate that day-to-day expenses are funded with tax revenue and debt-to-GDP ratio declines in five years.  

These rules leave the Government choosing between four avenues as predicted by the IFS as they prepare for the Spending Review in the summer: (1) Tweaking the fiscal rule (2) cutting spending, (3) raising taxes, or (4) breaking the fiscal rules. The Government has vowed not to raise taxes or go against their word on fiscal rules, which leaves tweaking the fiscal rule and spending cuts. 

Cuts to public spending could deprive businesses and universities of investment they need to collaborate, innovate, and grow. Specifically, cuts impacting talent, research, and innovation would have serious consequences for the UK’s future prosperity, growth, and progress. For instance, when the Government invests in Research and Development, it stimulates between £3 and £4 of private sector R&D investment in the long-term, according to an NCUB study.  

These spending cuts would come as business R&D investment has already declined by 6% in two years, according to another recent NCUB analysis. The UK economy needs more investment in innovation right now, not less.  

Additionally, these economic uncertainties will create challenges in an already competitive market for foreign direct investment, which has also shown signs of slowing down for the UK.  

What could the government do to alleviate current pressures?

The government must prioritise its growth agenda by supporting policies, funding, and regulation which encourages private sector investment and innovation, and supports a talented future workforce.  

NCUB is seeking to better understand how these factors hinder private innovation with its business-led R&D Taskforce. The Taskforce brings UK’s business leaders into conversation with one another to develop public- and private-sector solutions which incentivise R&D investment. We have also seen promising steps taken by the Government, such as the establishment of the new Regulatory Innovation Office, which seeks to ease the regulatory burden on business innovation. This regulatory streamlining must also maintain high standard in ethics, safety, and privacy. At the same time, efforts should focus on lowering the costs of infrastructure and major developments through more efficient planning processes. 

Addressing labour market responsiveness is equally critical. The government must ensure the supply of skilled labour aligns with the needs of the economy, including revisiting skilled immigration visa policies to attract and retain global talent essential for growth. 

These efforts—streamlining regulations, tackling infrastructure challenges, and addressing skill shortages—are particularly critical to advancing the new government’s agenda on artificial intelligence (AI). Building a robust AI ecosystem requires reducing barriers to innovation, improving digital and physical infrastructure, and ensuring a pipeline of talent that can support this transformative sector. 

This reassurance would prove especially advantageous now, as the United States faces economic uncertainty with the incoming Trump administration’s inflationary tariffs and deportations, as well as lingering doubts around the Federal Reserve’s continued independence. 

These uncertainties abroad provide the UK with an opening to be seen as a haven of economic stability and business-friendly policies. However, to achieve that, it must first ensure that it can sustain financial homeostasis, while working ardently toward the growth and investment the whole nation needs.