Key facts
- Global bond markets have seen a significant sell-off, increasing UK government borrowing costs.
- The 10-year gilt yield has reached its highest point since August 2027.
- Economists predict Chancellor John Healey will announce significant tax hikes in the upcoming Budget.
- Fiscal headroom available to the government is estimated to have fallen to £13bn.
- The UK government's debt interest payments are projected to increase significantly.
- Calls for increased defense spending and cost-of-living support add to fiscal pressures.
Chancellor John Healey is facing increasing pressure to implement significant tax hikes in the upcoming Budget, largely due to a sharp sell-off in global bond markets that has driven up the cost of government borrowing. Economists from Handelsbanken and Pantheon Macroeconomics have indicated that the rising yields on UK government bonds, specifically the 10-year gilt reaching its highest level since August 2027, are eroding the UK's fiscal headroom.
Handelsbanken's senior UK economist suggested that the increase in gilt yields makes fresh tax increases more likely on October 28. Pantheon Macroeconomics researchers noted that higher gilt yields have already reduced the available fiscal headroom to approximately £13bn, down from previous forecasts of around £15bn. They anticipate that "more large tax hikes are on the way."
The adverse impact on bond markets is expected to compel the Office for Budget Responsibility (OBR) to revise its projections for debt interest payments upwards for 2030. The UK government is currently slated to spend around £135bn on debt servicing in five years, with an estimated £110bn allocated for this year alone, nearly double the defense budget.
These fiscal pressures are compounded by demands for increased defense spending and measures to alleviate the cost of living crisis for households. Healey is tasked with securing an additional £1.2bn annually for a defense investment plan gap while also cutting expenditure in other government departments. Unfunded plans to remove VAT from energy bills, estimated to cost the state about £800m per year, also lack full detail.
Furthermore, there is pressure to raise defense spending to three percent of GDP, which would represent an increase of approximately £10bn. Healey had previously resigned as defense secretary under Sir Keir Starmer’s government over a failure to commit to this spending target by 2030.
Lord Jim O’Neill, a former Goldman Sachs executive who advised Andy Burnham on economic policy, expressed his expectation that the government might raise capital gains taxes. However, he cautioned that this would be detrimental to economic growth, potentially discouraging risk-takers.