The UK government is preparing to deliver a tax-and-spending Budget without increasing borrowing, as Chancellor John Healey faces mounting pressure from investors, businesses and public-service demands.

Measures including a cost-of-living package are expected to be funded through higher taxes or spending reductions rather than additional debt, according to people briefed on the preparations. The approach highlights the narrow room for manoeuvre confronting the government ahead of its 28 October Budget.

A constrained fiscal outlook

The Budget is expected to be “scorecard positive” by 2029-30, meaning discretionary spending announced in the statement would be fully funded by the final year of the parliament. The strategy is designed to reassure bond markets after a period of heightened volatility and rising government borrowing costs.

Fiscal pressures have intensified as higher interest rates increase the cost of servicing public debt, while ministers face demands for support with household bills, social care and defence. Analysts have warned that the government’s fiscal buffer has narrowed, leaving less protection against weaker growth or further market disruption.

Markets raise the pressure

UK borrowing costs rose sharply on Wednesday. Ten-year gilt yields reached 5.527%, their highest level since July 2007, while 30-year yields briefly climbed to 6.036%, according to market coverage. The move formed part of a wider global bond sell-off, compounded by higher oil prices and concerns about inflation.

Higher gilt yields make it more expensive for the government to borrow and can force the Treasury to find additional savings or revenue. They also increase pressure on the Bank of England, which must balance persistent price pressures against weak economic activity.

Businesses await clarity

Business groups are watching closely for signs that the Budget will protect investment and avoid adding to the cumulative tax burden on companies. The chancellor has also been seeking input from major banks, amid debate over whether financial institutions should face further taxation.

Separate business surveys point to a fragile recovery. Private-sector growth has slowed, while input-cost inflation has accelerated as energy and fuel prices rise. The combination of subdued demand, high borrowing costs and uncertainty over taxation risks weighing on hiring and investment.

A test of credibility

For Mr Healey, the central challenge is to offer targeted help without undermining the fiscal rules intended to anchor confidence in the UK’s public finances. Funding new measures through tax increases or spending cuts may reassure investors, but it could also constrain demand and intensify political pressure.

The Budget will therefore be judged not only by the scale of its announcements but by the credibility of its longer-term numbers. With gilt yields elevated and economic growth weak, the chancellor has little scope for an unfunded giveaway.