‘Large tax hikes on the way’: How the global bond rout is boxing in Healey

Chancellor John Healey faces the prospect of significant tax increases in this year's Budget, economists warn, as global bond markets experience a downturn that hikes borrowing costs for the government. A 10-year gilt yield surge to its highest level since August 2027 could further dent the £22.7bn fiscal headroom at Healey's disposal, according to Handelsbanken.

The bank's senior UK economist noted that this yield rise would "add to the likelihood that fresh tax increases will be announced on October 28". Pantheon Macroeconomics researchers added that higher gilt yields have reduced fiscal headroom to £13bn, below earlier estimates of around £15bn. Wood and Jordan-Doak of the consultancy concurred, stating that "more large tax hikes are on the way".

The market turmoil will also force the Office for Budget Responsibility (OBR) to revise upward its debt interest payment projections for 2030. The UK government currently earmarks about £135bn for debt repayment over five years. The OBR predicts the government will have to shell out £110bn this year, nearly double the defence budget.

Tax hikes are expected alongside other fiscal pressures, such as calls for increased defence spending and household support amid the cost of living crisis. Healey must find £1.2bn extra annually to cover a gap in the defence investment plan while trimming spending elsewhere. Plans to exempt energy bills from VAT, costing the state roughly £800m annually, remain unfunded.

Healey must also grapple with pressure to boost defence spending to 3% of GDP, a £10bn increase from current levels. Former Goldman Sachs advisor Lord Jim O'Neill expected the government to raise capital gains taxes, but warned this could deter genuine risk-takers.