Fears grow of tax rises on London as Chancellor John Healey hit with £3.5bn public finances Budget blow

Chancellor John Healey suffered a blow to the public finances just weeks before the Budget.

The figure was £2.9 billion (19.%) more than in August 2025 and £3.5 billion above the forecast by the Budget watchdog, the Office for Budget Responsibility (OBR).

Furthermore, the amount that central Government paid in interest on its debts was £8.8 billion in August, marking the highest figure for the month since records began.

Responding to the figures, shadow Chancellor Andrew Griffith said: “Labour have lost control of the public finances.

“It takes a rare fiscal incontinence to both have the highest tax take in history and see borrowing still shoot up.”

But Chief Secretary to the Treasury Emma Reynolds said: “Britain has huge potential to deliver good growth in every postcode, creating jobs, raising living standards and investing in the services people rely on.

“But we can only deliver that growth with fiscal discipline.”

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The London Standard

The bigger than expected borrowing figure was largely due to increased Government spending, partly due to the impact of stubbornly-high inflation, said the Office for National Statistics.

The latest figures came after a new report warned that Mr Healey will face pressure to raise taxes or cut spending at the Budget on October 28, as soaring borrowing costs because of the Iran war and weaker growth has wiped nearly £12 billion off the Government’s fiscal headroom.

Union chiefs are urging Chancellor John Healey to hike taxes on banks in the City

Getty

The KPMG economic outlook estimates that Mr Healey could be left with headroom of about £12 billion in the autumn, down from £23.6 billion at the time of the spring forecast.

It said rising borrowing costs on the UK’s debt after the Middle East conflict has already cut about £9 billion off the headroom, with sluggish growth and expected downgrades from the OBR likely to to reduce it by about another £2 billion.

KPMG said: “The Chancellor will have limited scope to provide significant support for growth or the cost of living when the Budget is delivered next month, as higher borrowing costs and weaker growth have reduced the Government’s fiscal headroom.

“Restoring the previous level of headroom could require tax rises or spending reductions.

“With the Government committed to not increasing taxes on working people, the Chancellor may need to consider other tax measures.”

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PA Wire

Long-term borrowing costs have been surging amid a gilt sell-off driven by inflation worries caused by the Iran war and rising expectations of a rise in interest rates by the year end.

These factors will combine to leave Mr Healey with “limited room for manoeuvre” at his first Budget in just over a month’s time, KPMG said.

The group is predicting UK interest rates will likely rise in November, from 3.75% to 4%, hiking mortgage bills for homeowners, but then start falling back next summer as the impact of energy prices on inflation fades away.