Home » What might the Chancellor’s debt woes mean for construction?

What might the Chancellor’s debt woes mean for construction?

Published: 05/08/2025

With public borrowing costs rising sharply and the Autumn Budget on the horizon, pressure is mounting on capital budgets and project pipelines. Dr David Crosthwaite, chief economist at BCIS, sets out four key fiscal trends that could shape construction cost and investment outlooks in the months ahead.

Public borrowing and interest costs are soaring

ONS data show that in June 2025 the government paid £16.4 billion in debt interest alone, up £8.4 billion on June 2024(1).

Borrowing – the difference between total public sector spending and income – hit £20.7 billion; £6.6 billion more than in June 2024 and the second-highest June borrowing figure since monthly records began in 1993, after that of June 2020.

For the public finances to remain sustainable, economists are suggesting around £25 billion may need to be found in the Autumn Budget through tax rises or spending cuts.

If the government tightens spending to plug fiscal gaps, infrastructure and housing budgets are at risk. Projects may be delayed, revised or cancelled.

These fiscal pressures raise a critical question for the built environment: can the government support infrastructure investment at the scale required? If tax rises or spending cuts are needed to close the gap, they will test the state’s ability to deliver on its infrastructure promises, especially with rising build costs and ongoing supply chain constraints. The risk is not just short-term disruption, but a weakening of investor confidence in the public sector’s capacity to maintain project pipelines.

Rising gilt yields push up borrowing costs for the sector

The Office for Budget Responsibility’s (OBR) March forecast projected that debt interest spending will reach £111 billion in 2025-26 and remain elevated over the next five years(2).

The OBR’s sensitivity analysis highlights that a 0.8 percentage point increase in gilt yields (the interest rates the government must pay to borrow money by issuing bonds), potentially triggered by declining demand from major buyers like pension funds, could add approximately £22 billion per year to the UK’s debt interest burden. While not a central forecast, this scenario underscores how debt servicing costs remain exposed to market shifts in gilt demand even if underlying debt levels remain stable.

When government bond yields (gilt yields) rise, borrowing becomes more expensive for capital projects, including those funded through the Public Works Loan Board (PWLB), which provides loans from central government to local authorities for schemes like housing, schools and roads.

Higher gilt yields also impact the cost of private finance, such as public-private partnerships or project bonds. This means that overall financing becomes more expensive, putting pressure on project budgets and value-for-money assessments. As a result, some schemes may need to be delayed, scaled back or reassessed.

Volatile public finances raise uncertainty in market pricing

The ONS and OBR have both reported that government borrowing is running above forecast, mainly because of higher interest payments on certain types of government debt that rise with inflation.

These inflation-linked bonds are tied to the Retail Prices Index (RPI), so as RPI remains high, the cost of servicing this debt has increased, putting further pressure on public finances.

The OBR’s latest Fiscal Risks & Sustainability report highlights the vulnerability of the UK’s public finances, pointing to the long-term growth in national debt as a key concern(3).

For construction professionals, this adds another layer of uncertainty to the outlook for public investment. Fluctuating public finances can lead to more volatile project pipelines and increase the risk of price changes during tendering and cost planning.

Heightened scrutiny on cost accuracy and project justification

With less room in the public budget and tighter oversight from government forecasters, there’s growing pressure to demonstrate value-for-money on construction spend. This means cost estimates, contingencies and benchmarks are likely to face closer scrutiny, especially on publicly funded schemes.

The Chancellor has signalled that tax options and spending restraint will be priorities in the Autumn Budget.

QSs and cost consultants will face increased demand for robust benchmarking, elemental costing and justification of contingencies in proposals. Reliable cost data will be essential to maintain credibility in business cases.

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The Building Cost Information Service (BCIS) is the leading provider of cost and carbon data to the UK built environment. Over 4,000 subscribing consultants, clients and contractors use BCIS products to control costs, manage budgets, mitigate risk and improve project performance.

Find out more

(1) Office for National Statistics – Public sector finances, UK: June 2025 – here

(2) Office for Budget Responsibility – Debt interest (central government, net of APF) – here

(3) Office for Budget Responsibility – Fiscal risks and sustainability – July 2025 – here

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