The British government is planning to increase public spending significantly, but market analysts caution that these proposals could unsettle the bond market, potentially increasing the nation's already substantial $143 billion-a-year interest payments.

Rachel Reeves, the U.K. Finance Minister, announced on Wednesday that the government intends to allocate billions of pounds to defense, healthcare, infrastructure, and other economic sectors in the forthcoming years. However, just a day after this announcement, official data revealed that the U.K. economy contracted by a larger-than-anticipated 0.3% in April.

In a scenario where economic growth is absent, funding public spending leaves the government with two choices: either generate revenue through increased taxation or accumulate additional debt.

One method for borrowing is through the issuance of bonds, referred to as gilts in the U.K., to the public market. By purchasing gilts, investors essentially lend money to the government, with the bond yield representing the return expected by the investor.

Gilt yields and prices have an inverse relationship—when prices rise, yields decrease, and vice versa. This year, gilt yields have exhibited volatility, with investors remaining sensitive to geopolitical and macroeconomic uncertainties.

The U.K. government's long-term borrowing costs surged to multi-decade highs in January, and the yield on 20- and 30-year gilts remains firmly above 5%.

According to official estimates, the government is projected to spend over £105 billion ($142.9 billion) on interest payments for its national debt in the 2025 fiscal year—£9.4 billion more than during the previous Autumn budget—and £111 billion in annual interest by 2026.

The government did not specify on Wednesday how it plans to finance its newly announced spending increases and did not respond to CNBC's inquiry regarding the source of the funds. However, in her Autumn Budget last year, Reeves outlined intentions to increase both taxes and borrowing. Following the budget, the finance minister promised not to raise taxes again during the current Labour government’s term, stating that the government “won’t have to do a budget like this ever again.”

Andrew Goodwin, chief U.K. economist at Oxford Economics, suggested that the British government might need to expand its spending plans further, especially as NATO is set to raise its defense spending target for member states to 5% of GDP, alongside a potential reversal on winter fuel payments for seniors and other possible welfare reforms.

Goodwin also noted that the U.K.’s Office for Budget Responsibility is likely to make “unfavorable revisions” to its economic forecasts in July, leading to lower tax revenues and increased borrowing.

“If the recent financial market pricing trends continue, debt servicing costs will be approximately £2.5bn ($3.4 billion) higher than they were at the time of the Spring Statement,” Goodwin warned in a note on Wednesday.

Mel Stride, the shadow Chancellor in the U.K.’s opposition government, remarked on CNBC’s “Squawk Box Europe” on Thursday that the Spending Review raises concerns about whether “a significant amount of borrowing” will be necessary to fund the government’s fiscal policies.

“[Government] borrowing has repercussions in terms of higher inflation in the U.K., resulting in interest rates [remaining] elevated for an extended period,” he stated. “It contributes to the debt burden, with servicing costs amounting to 100 billion [pounds] annually, twice what we spend on defense.”

“Regrettably, the overall economy is in a very weak state to endure the kind of spending and borrowing that this government is proposing,” Stride added.

Stride contended that Reeves will “almost certainly” need to raise taxes again in her next budget announcement expected in the autumn.

“We’ve ended up in a very fragile situation, particularly with the tariffs globally,” he said.

Rufaro Chiriseri, head of fixed income for the British Isles at RBC Wealth Management, told CNBC that rising borrowing costs were jeopardizing Reeves’ “already limited fiscal headroom.”

“This reduced headroom could create a snowball effect, as investors might become hesitant to hold UK debt, potentially leading to further selloffs until fiscal stability is restored,” she commented.

Iain Barnes, Chief Investment Officer at Netwealth, also noted to CNBC on Thursday that the U.K. is in “a state of fiscal fragility, so room for maneuver is limited.”

“The market is aware that if growth underwhelms, this year’s Budget may necessitate higher taxes and increased borrowing to fund spending plans,” Barnes stated.

However, April LaRusse, head of investment specialists at Insight Investment, argued that there are strategies to manage debt servicing burdens effectively.

The U.K.’s Debt Management Office, responsible for issuing gilts, has the flexibility to adjust issuance patterns—the maturity and types of gilts issued—to help control government borrowing costs, she explained.

“With the average yield on 1-10 year gilts at around 4% and the yield on 15 year + gilts at 5.2%, there is potential to make debt financing costs more manageable,” she elaborated.

Nevertheless, LaRusse pointed out that debt interest payments for the U.K. government are estimated to reach around 3.5% of GDP this fiscal year, and excessive spending could exacerbate the burden.

“This increase is driven not only by higher interest rates, which gradually lead to higher coupon payments, but also by elevated levels of government spending, adding to the fiscal burden,” she noted.

Correction: This article has been updated to correct a reference to Rufaro Chiriseri.