Warning higher borrowing costs may mean tax rises

Higher borrowing costs for the government may mean tax rises or spending cuts if it wants to stick to its own self-imposed rules, a leading economic think tank has warned.

According to a report from the Resolution Foundation, the government is spending £7bn a year more paying interest on its debt than it was at the time of the Budget.

As a result, the think tank said higher tax or cuts "may be needed" if the government wants to keep its promise not to spend more day-to-day than it brings in through tax.

A Treasury spokesperson told the BBC its commitment to its fiscal rules is "non-negotiable".

The report comes after Chancellor Rachel Reeves revealed her plan to boost the economy through backing a series of infrastructure projects, including a third runway at Heathrow.

Government borrowing costs began rising after the Budget last Autumn.

The Resolution Foundation said the rise has been "primarily driven by international factors", with US and European government debt also rising.

Other economists have said higher borrowing costs are at least partly a reaction to sluggish growth in the UK economy.

The increase has been much lower than following the 2022 mini-Budget, and borrowing levels have fallen since hitting their highest levels in several years earlier this month.

However, the Resolution Foundation said the risk of the government of breaking its own fiscal rules "remains on a knife edge" because borrowing costs remain higher than in the Autumn.

Resolution Foundation research director James Smith said Chancellor Rachel Reeves will need to meet the fiscal rules "or risk further market jitters".

"While the chancellor is rightly focused on fleshing out her long-term strategy for economic growth, tough short-term decisions, including fresh tax rises or spending cuts, may also be needed in the coming weeks to demonstrate her commitment to sustainable public finances," he added.

The government has already said it wants to cut down on "waste" and has said tax rises might be a possibility.

Reeves said in December departments would be asked to identify 5% "efficiency savings" as part of a review to set their budgets for the coming years.

"The chancellor has already shown that tough decisions on spending will be taken, with the spending review to root out waste ongoing," a Treasury spokesperson told the BBC.

Meanwhile, Prime Minister Sir Keir Starmer did not rule out more tax rises when asked by the BBC in December.

"If you look at Covid and Ukraine, everyone knows there are things we can't see now, but I can tell you our intention was to do the tough stuff in that Budget, not keep coming back," he said.