Nightmare for Brits as Rachel Reeves urged to make painful move to fix UK economy

Rachel Reeves will have to reduce public spending as borrowing costs soar, leading financial advisers have warned. As borrowing costs hit their highest since 1998 this week, climbing to a peak of 5.75% on Wednesday, they warned tax rises will not be enough to close the gap.

The government is funded mainly by taxes however, borrowing bridges the shortfalls, and in the last full financial year to March 2025, this was £148.3 billion. Now, wealth management advisers have warned that spending cuts may be announced if the government wants to deliver on the fiscal rules, to reduce the total borrowing as a proportion of the UK economy in the last year of parliament.

Nicolas Trindade, senior portfolio manager at Axa Investment Managers, warned that “tax rises alone won’t be nearly enough”.

He told the Financial Times the government needs “significant spending cuts to be announced which politically is going to be very challenging as seen during this summer”.

The government is currently in about £2.9 trillion of debt which is more than double the amount seen from the 1980s through to the financial crisis of 2008. However, it is less than the equivalent figures for some other leading economies.

The financial crash and the Covid pandemic pushed the UK's debt up, but all of this borrowing comes with interest. If the government has to set aside more cash for paying debts and interest, it may mean it has less to spend on public services.

“Investors have concluded that relying on tax hikes alone to close a fiscal shortfall is destined to end in failure,” Mark Dowding, fixed income chief investment officer at RBC BlueBay Asset Management, told the FT.

He warned of the risk of a “doom loop” where rising borrowing costs widen the fiscal shortfall, adding to debt worries.

Labour announced spending cuts through welfare and Winter Fuel Payments, however, its controversy led to a U-turn that has been predicted to leave a £6billion fiscal gap by 2029-30, according to analysts at Capital Economics.

Downing Street said there was "no doubt about the government's commitment to economic stability", and that "meeting our fiscal rules is non-negotiable".

In October's Budget, Chancellor Rachel Reeves changed the definition of debt that the government would use to free up spending costs for infrastructure.

Many fear the government is borrowing too much, while others argue extra borrowing helps the economy grow faster and generates more tax revenue in the long run.