Chancellor John Healey is likely to roll-out “large tax hikes” at this year’s Budget due to a rout in global bond markets pushing up the cost of government borrowing, economists have said.
A jump in the 10-year gilt yield to the highest level since August 2027 could “further erode” the £22.7bn level of fiscal headroom available to Healey, according to Handelsbanken, as the government is forced to pay billions of pounds more in debt interest payments.
The bank’s senior UK economist said a rise in gilt yields would “add to the likelihood that fresh tax increases will be announced on 28 October”.
Pantheon Macroeconomics researchers suggested that higher gilt yields had now cut the fiscal headroom to just £13bn, below previous forecasts of around £15bn before a recent sell-off in bonds caused borrowing costs to rise.
Rob Wood and Elliott Jordan-Doak, economists at the consultancy, also agreed that “more large tax hikes are on the way”.
The hit to bond markets would force the Office for Budget Responsibility (OBR) to revise up its projections on debt interest payments in 2030. The UK government is currently set to spend about £135bn in paying off debt in five years.
The OBR said that the government would have to spend about £110bn in paying off lenders this year, which is nearly double the amount spent on defence.
Tax hikes loom
Upgrades on forecasts for borrowing costs would go along with a swathe of other fiscal pressures facing Healey, including calls for further defence spending and support for households in dealing with the cost of living.
The Chancellor is tasked with finding an extra £1.2bn a year to fund a gap in the defence investment plan while also cutting expenditure across other government departments.
Funded plans to strip VAT from energy bills, which could cost the state about £800m a year, have also not been fully laid out .
The Chancellor is also under pressure to raise defence spending to three per cent of GDP, which would represent a boost of about £10bn to expenditure on the military compared to current levels. Healey resigned as the defence secretary under Sir Keir Starmer’s government over a failure to commit to raising defence spending to three per cent by 2030.
Lord Jim O’Neill, the former Goldman Sachs executive who advised Andy Burnham on economic policy, said he expected the government to raise capital gains taxes although he said it should be the “the last thing that should be happening when we want more growth”.
“It will force even more genuine risk takers to be discouraged and think about either moving or not doing as much of this kind of thing as they’ve done,” he said in an interview with LBC.