UK finances deteriorate, raising tax rises probability in Budget

Tax hikes are “increasingly likely” when Chancellor Rachel Reeves delivers her Budget next month after new figures revealed a sharp worsening in the government’s finances.

This is warning from the CEO of global financial advisory giant deVere Group following yet another disappointing piece of economic news which will add to her mounting challenges.

Fresh data show that borrowing over the first five months of the fiscal year has overshot projections by more than £11 billion, intensifying concerns over Britain’s ability to keep debt on a sustainable path.

Investors reacted swiftly, driving the pound lower and sending the yield on long-dated UK government bonds to a three-year high relative to comparable US securities.

Nigel Green, chief executive of deVere Group, warns that the government has little room left to manoeuvre.

“The shortfall in public finances is deepening at a pace that demands action,” he says.

“The Chancellor will need to increase revenues to prevent the markets from questioning the UK’s fiscal credibility.”

The Bank of England’s decision to maintain interest rates while consumer prices remain nearly twice the official target compounds the challenge. Growth indicators point to slowing activity and a softer labour market, but high inflation keeps the central bank from offering much relief.

“Investors are already demanding a higher premium to hold UK debt,” Nigel Green notes.

“If the government signals hesitation or delay, borrowing costs could climb further. To maintain market confidence, the Budget must show a firm commitment to debt reduction, and that will almost certainly involve higher taxation.”

Sterling has fallen sharply over the past two sessions, with traders citing the weaker fiscal outlook and uncertainty over future economic policy. Gilt prices also slid, pushing the 30-year yield well above five and a half percent.

Although retail spending ticked up in August on the back of warm weather, the broader economic picture remains fragile. Hiring is slowing, wage growth is easing and consumer confidence is subdued.

These trends limit the scope for growth-driven revenue gains and strengthen the case for tax measures to close the deficit.

The CEO emphasises that global markets will scrutinise every detail of the Chancellor’s plan. “International investors need to see evidence that Britain is serious about balancing its books,” he says.

deVere Group expects the upcoming Budget to set the tone for financial policy well into next year, with Reeves under “intense pressure to prove that Britain can meet its fiscal obligations despite weaker growth and persistently high inflation.”