Budget tax raids now ‘INEVITABLE’ as borrowing hits 28-year-high in huge blow to Andy Burnham

TAX rises at next month’s Budget are now “inevitable”, top economists have warned, after Britain’s borrowing costs soared to their highest level in 28 years. The interest rate the government must now pay to borrow money over 30 years has jumped to 5.85%, the highest level since 1998. The rate on 10-year borrowing has also shot up to as high as 5.25 per cent, the steepest level in 18 years. It means it is now far more expensive for the government to borrow the money it needs to run the country, leaving Chancellor John Healey with a shrinking pot of cash before his first Budget. Sign up for the Money newsletter Thank you! Every Budget, the Chancellor sets aside a financial buffer known as “headroom”, the amount of spare cash left over after meeting their own borrowing rules. That headroom acts as a safety cushion, giving the government room to fund public services without breaking its promises on debt. When borrowing costs rise, the government has to spend more just on interest payments, eating directly into that cushion. Less headroom means less room for manoeuvre, forcing the Chancellor to choose between cutting spending or raising taxes to balance the books. Rob Wood, chief UK economist at Pantheon, said spending cuts look unlikely, meaning tax hikes are now the only realistic option left on the table. He said: “The Chancellor could rebuild headroom with spending cuts or tax rises, but the former seem unlikely. Most read in Money “So we thank large tax rises are again inevitable in the Budget.” His analysis suggests the rising cost of borrowing alone has slashed the Chancellor’s financial wiggle room from around £24billion down to just £13billion since the spring. Ruth Gregory, deputy chief UK economist at Capital Economics, warned Healey could now be facing the exact same squeeze that dogged his predecessor Rachel Reeves. She said the Chancellor may need to find between £9billion and £14billion through tax rises or spending cuts just to keep the public finances on track. Julian Jessop, economics fellow at the Institute of Economic Affairs, said the sheer size of Britain’s interest bill has become a crisis in itself. He said the government now spends more than £100billion a year just paying interest on its debts, dwarfing the £60billion spent on defence. He warned that without savings elsewhere, “further tax increases would then be inevitable.” The bond market turmoil is not just a UK problem. Investors have been dumping government bonds around the world, pushing up borrowing costs in Japan and Germany too. The sell-off has been driven by fears that central banks may need to raise interest rates again, after fresh fighting in the Middle East sent oil prices surging and stoked fresh worries about inflation. Brent crude, the global oil benchmark, jumped above $91 (£67) a barrel. The pound also slipped against both the dollar and the euro as the market jitters spread. Kathleen Brooks, research director at XTB, said every increase in borrowing costs adds directly to the bill taxpayers must foot. Britain has already spent around £109billion on debt interest in the most recent financial year, according to the House of Commons, close to the highest level in 50 years. That works out at nearly 4p of every £1 the government spends going straight on interest payments alone. In next month’s Budget, Prime Minister Andy Burnham and Chancellor Healey will have to lay out their economic plan against this backdrop of surging borrowing costs and stubborn inflation. Official figures published last month showed a surprise jump in government borrowing in July, with the government borrowing £1.8billion, some £700million more than in the same month last year. Healey has pledged to stick to strict fiscal rules set by Reeves, even as Burnham has rolled out a series of measures to ease the cost-of-living crisis since taking office over the summer. Experts now believe Britain’s total national debt has topped £3trillion for the first time, according to the TaxPayers’ Alliance. The group estimates the government is now borrowing £4,270 every second, working out at £369million a day. Comment now