The investment bank sees gilt yields staying elevated, squeezing the government's spending room by £12 billion.
Goldman Sachs has warned that UK government borrowing costs are likely to remain stubbornly high, caught between rising energy prices driven by the war in Iran and deepening political uncertainty over the future of Prime Minister Keir Starmer.
In practical terms, that means the interest the government pays on its debts will stay elevated, leaving less money available for public services and making it harder for Chancellor Rachel Reeves to balance the books.
The yield on the 10-year gilt, the benchmark measure of UK government borrowing costs, climbed above 5.1% on Monday, its highest level since July 2008, while 30-year gilt yields briefly touched 5.81%, a level not seen since 1998.
Goldman estimates that higher gilt yields and weaker economic growth could reduce the government's fiscal headroom, the narrow cushion between its spending plans and its self-imposed borrowing limits, by around £12 billion.
To put that figure in perspective, £12 billion is roughly equivalent to the cost of building nine or ten large NHS hospitals under the government's New Hospital Programme, where major rebuilds are now routinely projected at between £1 billion and £1.5 billion each.
Alternatively, it would cover almost the entire Department for Education capital budget for two years, or go a long way towards addressing the £15.9 billion maintenance backlog across the NHS estate that a parliamentary watchdog flagged just last month.
England's school estate faces a similarly stark £13.8 billion repair backlog, with buildings dating from the 1960s and 1970s crumbling and the RAAC concrete crisis still unresolved.
So, the fiscal headroom Goldman estimates has been wiped out by higher borrowing costs is not an abstract accounting number.
It is the difference between hospitals being built or delayed, school roofs being fixed or left to deteriorate, and a government that can invest in public services or one forced to spend ever more simply servicing its debts.
The bank's economists said the bulk of the gilt selloff has been driven by a sharp shift in expectations for Bank of England interest rates rather than political risk alone, though some political risk premium has crept into the market in recent weeks.
More than 70 Labour MPs have publicly called for Starmer to resign or set out a timetable for his departure, and prediction markets are pricing in a 57% chance he will be gone by the end of May and 87% by the end of the year.
Goldman said a change in Labour leadership raises the risk of a shift in the government's fiscal rules, potentially allowing higher defence spending without offsetting cuts elsewhere.
Andy Burnham, the mayor of Greater Manchester and a potential leadership contender, has argued that defence spending should sit outside the rules entirely.
However, the bank cautioned that any new leader would still face the same constraints: an elevated national debt, rising spending pressures and the knowledge that bond markets have punished fiscal looseness before.
On interest rates, Goldman expects the Bank of England to hold steady this year but said there is a low bar for rate rises over the summer if energy prices remain elevated. Market expectations have shifted dramatically since the start of the year, moving from pricing in rate cuts to around 60 basis points of hikes.
For investors, Goldman's strategists said they see value in UK real estate stocks for those willing to look through the political noise, while warning that sterling faces bouts of weakness rather than a sustained decline.
Separately, Citi strategists warned that current gilt yields may not fully reflect the risk of a leadership challenge, adding that a leftward shift in Labour policies and more expansionary fiscal spending could push borrowing costs higher still.