Britain’s economic landscape has grown increasingly fraught in recent weeks, as government borrowing costs have soared to levels not seen since the late 1990s and Chancellor Rachel Reeves faces mounting pressure over her fiscal strategy. With long-term gilt yields closing above 5.6%—a 27-year high—investors and political opponents alike are questioning whether Reeves can steady the ship or if more turbulence lies ahead for the UK economy.
When the Labour government assumed office in early 2024, the economic fundamentals appeared relatively robust. According to Sir John Redwood, a former MP and Secretary of State for Wales writing in The Telegraph, inflation was on target at 2%, unemployment had reached a decade low of 4.2%, and the UK boasted the fastest growth among G7 nations for the first half of the year. Yet, Labour’s initial messaging painted a bleaker picture, emphasizing the lingering pain of post-pandemic inflation, higher interest rates, and the aftershocks of lockdown on growth. This, Redwood argues, set the stage for a self-fulfilling prophecy: “If you talk an economy down you can help undermine confidence; if you threaten tax rises people and businesses put investments and larger purchases on hold.”
The government’s first budget, led by Chancellor Reeves, marked a turning point. Tax increases targeted family farms, small businesses, energy-intensive industries, employers, and savers. The upshot, according to Redwood, was a sharp decline in job vacancies, rising unemployment, and a worsening public finance outlook. “No wonder unemployment rose, vacancies fell sharply, and the public finances got worse,” he wrote. Since Labour took office, official figures show that unemployment has risen by more than 200,000, and growth has slowed sharply (Daily Mail).
Now, with borrowing costs reaching their highest since 1998, the pressure on Reeves is intensifying. Yields on government bonds—gilts—have surged as investors grow jittery over the Chancellor’s plans and persistently high inflation. When demand for gilts drops, yields rise, translating to higher interest rates on government borrowing. The UK now faces the highest borrowing costs among major advanced economies, and the Office for Budget Responsibility (OBR) has warned that the country “cannot afford the array of promises that it has made to the public” (Daily Mail).
The rising yields have had an immediate impact on Reeves’s fiscal maneuvering room. At the time of the Spring Statement, she had £9.9 billion of “headroom” to balance the books. But Andrew Goodwin, UK chief economist at Oxford Economics, told The Telegraph that roughly £6.5 billion of this buffer had been wiped out by the surge in borrowing costs, leaving Reeves with precious little space to maneuver. “If market pricing stays where it is today, it will knock about £6.5bn off the £9.9bn of headroom. When you factor in the U-turns on welfare reforms and winter fuel payments for some pensioners, all of the headroom disappears,” Goodwin explained.
These U-turns have proven costly. Reeves was forced to reverse proposed reforms to disability and incapacity benefits, and to restore winter fuel payments to most pensioners—moves that, together, will cost the Treasury an estimated £5 billion. At the same time, inflation rose to 3.7% in July 2025, the highest level since early 2024 and well above the Bank of England’s 2% target. Policymakers worry that rising food prices could fuel further demands for higher pay, adding to the inflationary spiral.
Against this challenging backdrop, economists warn that Reeves may have little choice but to raise taxes by at least £20 billion in the upcoming autumn budget. Alex Kerr of Capital Economics estimated that the Chancellor would have to raise between £17 billion and £27 billion, “most of which will probably be funded by tax rises” (The Telegraph). Others have warned of a potential £50 billion black hole in the public finances if growth continues to falter and borrowing costs remain elevated.
The government is reportedly exploring new revenue streams to plug the gap. According to The Guardian, the Treasury is considering a national property tax to replace stamp duty on owner-occupied homes. The proposed tax would apply to the sale of homes worth more than £500,000, with a rate of 0.54% and an additional 0.278% supplement on properties valued over £1 million. This would, in theory, raise a similar amount of revenue as the current stamp duty system. A Treasury spokesperson emphasized, “We are committed to keeping taxes for working people as low as possible, which is why at last autumn’s budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee national insurance, or VAT.”
But the prospect of a new property tax has drawn sharp criticism from the opposition. Sir Mel Stride, Conservative shadow chancellor, argued, “This tax grab would punish families for aspiring to own their own home. Under Labour nothing is safe. Your home, your job, your pension – the Chancellor has all of it in her sights. Rachel Reeves will tax your future to pay for her failure.”
Meanwhile, the Bank of England’s approach to managing its own balance sheet has come under scrutiny. The OBR has projected that the Bank plans to lose £257 billion from late 2022 onwards, sending taxpayers bills for tens of billions each year. Sir John Redwood described this as “self harm on an absurd scale,” and urged the Treasury and Bank to halt bond sales at a loss to reduce the burden on taxpayers.
As the government prepares for its next budget, the stakes could hardly be higher. Economists and market analysts warn that any further relaxation of fiscal rules, unchecked public spending, or additional tax hikes could further erode confidence and drive borrowing costs even higher. “If she thinks another tax raising budget is what is needed to ‘stabilise’ the public finances, she will find out again it is the last thing the economy needs,” Redwood cautioned.
There is little doubt that Reeves faces a daunting task. She must balance the need for fiscal discipline with the political realities of public service demands and welfare spending. Her ability to restore confidence—both in financial markets and among voters—will likely determine not just the fate of her Chancellorship, but the economic trajectory of the UK in the years ahead.
For now, all eyes are on the autumn budget, where Reeves will have to demonstrate whether she can break the so-called “doom loop” of rising taxes, slowing growth, and mounting debt, or whether Britain’s economic woes will deepen further.
