Britain warned it's in 'deeply uncomfortable' fiscal position ahead of 'challenging' budget

The UK is in a "deeply uncomfortable" fiscal position ahead of next month's budget, experts have warned, after government borrowing costs soared to a near 30-year high amid growing pressure on global bond yields.

Rising oil prices as a result of renewed hostilities in the Iran war, and fears of further escalation in the conflict, have sustained pressure on bond yields, which are effectively the interest rate in the markets.

In the UK, the yield on 10-year gilts stretched to 5.24% from 5.22% on Tuesday, while the 30-year hit 5.87%, up from 5.85%. And the trend could quickly trickle down into Britain's mortgage market, reports the Sky News Money blog, thrusting more pressure upon household finances.

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Kathleen Brooks, research director at XTB, painted a grim picture of the country's fiscal position, describing it as "deeply uncomfortable".

She said: "Added to this, the interest rate futures market is pricing in more than three rate hikes between now and July, which could add significant pain to households.

"The first hike could be in November, with UK interest rates expected to reach 4.26% by February next year."

A 'major challenge' for PM

The surge in borrowing costs comes just weeks before Chancellor John Healey is due to deliver his first budget and could have implications on Andy Burnham's spending plans.

The prime minister has made clear his intentions to spend big on priorities such as the cost of living and defence; however, Ms Brooks said the rise in bond yields poses a "major challenge" for the government.

"Every basis point increase in the cost of borrowing in the UK adds to debt servicing costs, which need to be paid by the public purse," she said.

"Since the spring, the UK's interest-only bill has risen by up to £6bn by the end of this parliament. This is a large hole for the chancellor to fill next month."

The budget is due to be delivered on 28 October.

Burnham won't rule out tax rises

At his first PMQs as prime minister on Wednesday, Mr Burnham refused to rule out future tax rises to help fund his pledges.

Pushed by Conservative leader Kemi Badenoch on his plans, he said: "I've already indicated my first moves were to cut tax, but I'm not going to do what any prime minister has done and write the budget here.

"I can also say to her that he [Chancellor John Healey] and I took a deliberate decision to set an early date for the budget so that we reduce the period for prolonged speculation of the kind that she is wanting us to indulge in today."

The PM did, however, commit to spending 3% of GDP on defence by 2030, saying: "I've made that commitment, made it very clear, and I have done for a considerable period of time."

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Fiscal responsibility 'essential'

Speaking to Sky's Cathy Newman Show on Wednesday, Bridget Phillipson, the Labour Party chair and minister for women and equalities, admitted that "global factors" were causing "significant economic headwinds".

She insisted it was the government's responsibility to ensure the UK has a "strong economy from which we can invest in our public services".

Ms Phillipson said: "John Healey has made very clear that our approach on fiscal discipline and having a budget that allows us to invest in our country's future, but does maintain credibility where it comes to investors, is critical for any government."

She said that, ahead of the budget, she would not be "engaging in speculation" over possible tax rises, adding that the chancellor had been "clear that fiscal responsibility is essential" amid current "challenges".

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