Rachel Reeves handed stark economy warning as borrowing costs hit 28-year high

Rachel Reeves has been handed a stark economy warning as Government borrowing reached its highest level in almost 30 years.

Speaking to GB News, Mitchell Palmer, an economist at the Adam Smith Institute, warned the Chancellor is "running a very high cash deficit" which is "not going to abate anytime soon".

The UK's long-term Government borrowing costs surged to their highest level in nearly three decades on Tuesday afternoon, as fears surrounding the Iran conflict continued to unsettle financial markets.

The yield on 30-year gilts climbed by 0.14 to 5.798 per cent, marking the highest level recorded since 1998.

Reacting to the figures, Mr Palmer stressed the UK Government currently has "higher borrowing costs than any other G7 country".

He told GB News: "Certainly the recent increase is largely because of inflation shocks, and part of those inflation shocks is they're going to hit the UK harder than most other parts of the world because of our energy system being so expensive.

"But the longer term dynamic that the UK has higher borrowing costs than any other G7 country is driven by effectively supply and demand."

Mr Palmer explained: "These long term bonds used to be bought by defined benefit pension schemes. They used to be bought by a variety of long term investors.

"Those long term investors now are no longer confident in the UK but also no longer need those products. So in particular the DB pension funds are now mostly paying off their pensioners rather than accumulating and investing those funds."

The economist argued the Government is "constantly pumping gilts into the market" and running a "high cash deficit".

He warned: "The Government is constantly pumping gilts into the market, because it effectively is running a very large cash deficit.

"And crucially, that doesn't look like it's going to abate anytime soon."

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Highlighting Ms Reeves's promise to "reach a surplus by the end of the Parliament", Mr Palmer admitted it is "not likely" to be achieved.

He told GB News: "Rachel Reeves has committed to reaching a surplus by the end of the Parliament, but so has every previous Chancellor, and none of them have so far managed since I think 2001. So I'm not sure that's likely to happen.

"And crucially, even if she reaches the surplus by the end of this Parliament, the pressures in the welfare state and the health budget are such that we're likely to just need to keep borrowing unless something fundamental changes."

In response to Mr Palmer's remarks, GB News host Mark White questioned whether what the UK was experincing has got "very little to do with the war in Iran" and "much more to do with Government policy".

Mr Palmer partly agreed: "This recent peak is the war in Iran, but the longer term dynamic, which is that the UK has very high borrowing costs for a developed country, is entirely downstream of Government policy, but not just this Government.

"Let's be clear, it is downstream of successive Governments choosing to put everything on the credit card, not save for a rainy day, and this Government is just the the next one in succession that's doing that."

A Downing Street spokesman has confirmed the Chancellor had briefed ministers on the fiscal outlook.

Ms Reeves has said any financial support for households affected by the Iran crisis would be "targeted" rather than universal.

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