UK Budget Under Pressure as Borrowing Costs Climb and Tax Changes Near

UK — Rising Borrowing Costs and Tax Decisions Put Pressure on Government Budget

Britain’s government is facing mounting pressure to maintain fiscal discipline while supporting the economy as Finance Minister John Healey prepares to present his first budget. The challenge comes amid rising global borrowing costs and persistently high energy prices associated with the Iran war.

Investors are watching closely for details on government borrowing, taxation and public spending, looking for assurances that the budget will protect confidence in Britain’s financial position.

The government’s financial headroom has contracted sharply in recent months. Its fiscal buffer was £24 billion in March, but economists now estimate that the amount has declined to between £8.5 billion and £20 billion.

Rising bond yields have added to the strain by making government borrowing more expensive. Britain’s 10-year borrowing costs have climbed by almost 30 basis points since the start of September, reaching around 5.33%.

Over the same period, France’s 10-year borrowing costs increased by 86 basis points to 5.05%.

Several developments have nevertheless helped support British financial markets. Stronger economic data, relative political stability and the Bank of England’s decision to suspend its gilt sales have contributed to improved investor sentiment.

Guillermo Felices, PGIM’s global investment strategist, said Britain was performing relatively well compared with other major developed markets experiencing higher bond yields.

Sterling has also shown resilience, rising to a 17-month high against the euro. However, Bank of America analysts have warned that investors could be underestimating the potential risks associated with the budget.

Bank taxation is among the key issues under scrutiny. Media reports indicate that the government could raise the 3% surcharge banks pay on their profits as it looks for additional revenue without imposing widespread increases in major taxes.

Shares in HSBC, NatWest, Lloyds and Barclays have declined between 6% and 11% so far in October. The losses are broadly in line with weakness across European banking stocks, although uncertainty over the budget has also affected investor sentiment.

Gambling operators are also assessing the possibility of higher Machine Gaming Duty, a levy on net takings from certain fruit machines, slot machines and quiz machines. The Times reported that the rate could increase by five percentage points, moving from 20% to 25%.

Pub companies, meanwhile, may benefit from a more favorable outcome. Recent trading updates from Wetherspoon, Mitchells & Butlers, Marston’s and Fuller Smith & Turner have helped drive their shares up between 10% and 25% this month.

The housing sector is another area where the budget’s decisions could have significant consequences. Housebuilder shares surged in late September after the government confirmed plans for a new support scheme for first-time buyers. However, subsequent increases in bond yields and mortgage rates have wiped out much of those gains.

Businesses and investors are therefore awaiting the budget for greater certainty on taxation, borrowing and economic assistance. The government’s decisions could have implications for financial services, consumer-facing businesses and the housing market.