Chancellor Rachel Reeves may be forced to impose a bigger package of tax rises or spending cuts in the autumn budget than earlier expectations as the pound slumped and borrowing costs soared to a 27-year high.
After being forced into two big summer u-turns – on winter fuel payments and welfare reform – the Chancellor has a £40 billion hole to fill.
Tax revenues are suffering from low growth while her hike in national insurance contributions last year has contributed to rising inflation.
Today the pound fell by more than 1% against the dollar as the interest rate on 30-year government debt rose to 5.72%, the highest level since 1998.
Ms Reeves has promised not to repeat her tax raid on incomes last October but she is now being forced to consider a range of other taxes, including levies on the banks, a mansion tax and changes to pensioner taxes.
The pressure is mounting as the Prime Minister brought in new advisers, including Ms Reeves’ Treasury deputy Darren Jones, to bolster his ailing government’s economic plan.
While other countries, notably France and the US are facing similar preesures, the UK’s borrowing costs are suffering in particular from rising inflation.
Markets are worried that tax increases will be more aggressive than expected and will further undermine prospects for growth. Persistent inflation could put interest rate cuts on hold for months.
“The markets are making their view brutally clear,” said Nigel Green, chief executive of deVere Group, a financial advisory and asset management firm.
“The message from the bond market is the same as the one that humiliated Liz Truss: fiscal credibility cannot be faked. Reeves will have no choice but to deliver tough measures – either tax rises, spending cuts, or both—if she wants to prove that Britain’s debt can fall in line with her fiscal rules.”
Another analyst added: “Markets appear less focused on Treasury rhetoric and more on whether the government can present a credible plan to control spending.”
The budget will be presented on 26 November, giving the Office for Budget Responsibility its ten-week notice period to prepare updated forecasts.
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