Is the UK Headed for a Debt Crisis?

TL;DR

UK bond yields hit multi-decade highs due to the Iran war, structural deficits, and markets fearing Starmer's political collapse would trigger reckless spending.

Key Points

• 1.UK borrowing costs have surged to post-1998 highs. 30-year bond yields exceeded 5.7%, 20-year yields are also at post-1998 highs, and 10-year yields are the highest since 2008, reflecting market concern over the UK's 94% debt-to-GDP ratio.
• 2.The Iran war is the immediate trigger. Closure of the Strait of Hormuz pushed oil prices from ~$70 to ~$110 per barrel, threatening UK inflation, forcing potential Bank of England rate hikes, and risking a costly household energy support package similar to the £50bn 2022 scheme.
• 3.The UK's structural fiscal weakness amplifies the pain. The UK ran a 5.4% of GDP budget deficit in 2025 — the largest in the OECD except Poland — and has uniquely failed to bring public spending back to pre-pandemic levels, making markets reluctant to lend long-term.
• 4.Political instability around Keir Starmer is driving the UK-specific selloff. Bond yields spike each time Starmer's leadership looks threatened — including after Rachel Reeves was seen crying in Parliament and after Labour MP Andrew Gwynne resigned — as markets fear a successor would pursue more expansionary borrowing.
• 5.An acute debt crisis is not imminent, but the fiscal trap is real. Borrowing remains possible but expensive, and rising debt servicing already consumes virtually all of the forecast 3.6% of GDP tax increase by 2030, meaning higher taxes will deliver no improvement in public services.