GUEST COLUMN:
Dr Edward Thomas Jones
Senior Lecturer in Economics
The Albert Gubay Business School, Bangor University
The Irish government can currently borrow at around 3.4 per cent on ten-year debt. That compares with just over 5 per cent for the United Kingdom, while Austria and Finland also face higher ten-year borrowing costs.
That is a striking reversal. Less than two decades ago, the collapse of the Celtic Tiger was followed by a banking crisis and an international bailout. Today, investors lend to the Irish government at substantially lower rates than to the UK or the United States. How times change.
In May, I wrote here about rising UK gilt yields and what they could mean for the Welsh economy. My focus was on how higher government borrowing costs feed into mortgage rates, business finance and long-term investment. Three months later, the issue has become much bigger than the UK gilt market.
Tremors have been running through government bond markets around the world. Long-term borrowing costs have risen sharply in the US, Germany, Japan and elsewhere. The UK remains particularly exposed, with borrowing costs among the highest in major advanced economies.
August has been an eventful month for US Treasuries. The yield on 30-year government bonds briefly climbed above 5.3 per cent, its highest level since 2007, while US national debt passed $40 trillion. On 19 August, the US Treasury unexpectedly announced that it would double buybacks of some longer-dated government bonds. Buybacks are a normal part of debt management, used to improve market liquidity. What attracted attention was the timing, a day after long-term yields had reached their highest level in 19 years.
Bond prices and yields move in opposite directions. When investors become less willing to hold government debt at existing prices, bond prices fall and yields rise. That can reflect concerns about a government's finances and its ability to manage its debts. But yields are not a simple measure of creditworthiness. They also reflect inflation expectations, central bank interest rates, debt issuance and the return investors demand for lending over longer periods.
Some of the recent increase has shorter-term explanations. Higher oil prices have added to inflation concerns, while quieter August trading can amplify price movements. There is also unusually heavy competition for capital. Governments are issuing large quantities of debt while major technology companies raise enormous sums to finance Artificial Intelligence (AI) infrastructure. Amazon and Alphabet, Google's parent company, are among those competing with governments for investors' money. With more debt seeking buyers, borrowers may have to offer higher yields.
These pressures sit on top of a more fundamental change. The era in which Western governments could assume borrowed money would remain cheap indefinitely is over. The IMF estimates that global public debt reached almost 94 per cent of GDP in 2025 and expects it to reach 100 per cent by 2029. Higher debt combined with higher borrowing costs leaves governments with less room to respond when something goes wrong. Economists describe this as fiscal space: the capacity to respond to recession, an energy shock or a security crisis without undermining confidence in the public finances.
This is not an argument for reducing debt at any cost. Borrowing to finance productive infrastructure can increase economic capacity and future tax revenues. What matters is whether debt remains manageable and whether investors believe the government has a credible plan for the public finances.
Ireland illustrates the point. Since the Eurozone crisis, its public finances have strengthened substantially. Ireland recorded its fourth consecutive surplus in 2025, meaning government revenues exceeded expenditure, while government debt has also fallen markedly. The IMF assesses Ireland as being at low risk of encountering difficulties financing its debt. Corporation tax receipts do, however, depend heavily on a relatively small number of multinational companies, and the IMF has warned against assuming these unusually strong revenues will continue indefinitely. Even so, Ireland enters the present uncertainty with considerably more fiscal room than it had during the financial crisis.
The UK's position is less comfortable.
The Office for Budget Responsibility (OBR) expects public sector net debt to rise from around 94 per cent of GDP in 2025-26 to more than 96 per cent by 2028-29. In July, it warned that, without future policy action, debt would eventually move onto an unsustainable path and rise steeply during the 2040s. This does not point to an imminent British debt crisis. It does mean that the UK is entering a period of expensive borrowing and growing demands for defence, energy security and infrastructure with relatively little room for error.
For Wales, the UK's fiscal position matters directly. Higher gilt yields affect financing conditions facing Welsh households and businesses and can alter the viability of major investment projects. More importantly, when the next recession, energy shock or security crisis arrives, Wales will depend heavily on the UK government's fiscal capacity to cushion households and firms, sustain public investment and protect public services.
That is why fiscal credibility matters beyond the bond market. The issue is not simply the interest rate at which the UK government can borrow today, but whether the public finances retain enough fiscal space to cushion the next shock. For Wales, losing that space would mean not only higher borrowing costs, but fewer options to support households, businesses, public services and investment when the economy comes under pressure.
