UK warns of fiscal crisis as Britain faces highest G7 borrowing costs

Former Bank of England chief economist Andy Haldane warned that the UK is on thin ice ahead of the Oct. 28 Autumn Budget, urging the government to cut public spending to stabilize financial markets.

The warning arrives as Britain faces the highest government borrowing costs in the G7. Gilt yields have climbed amid domestic and global economic instability, leaving the country with a fragile fiscal position. Haldane noted that international markets have created a hostile environment for borrowers, but the UK is particularly vulnerable because it acts as a leveraged bet on the global economy.

"The truth is we are skating on pretty thin ice in fiscal terms, and nothing would be worse both economically and politically than if the ice were to crack beneath our feet," Haldane said. He argued that the only way to prevent this is for the government to show it can reduce public spending. "That is the Achilles' heel of this government. Unless and until action is taken on that, [Prime Minister Andy Burnham] will remain, alas, in hock to the bond market."

Finance minister John Healey is preparing the first budget under Prime Minister Andy Burnham, who took office over the summer. Healey wants to create a fiscal buffer against uncertainty while managing sticky inflation, high borrowing costs, and slow growth. The administration also plans to ease living costs, devolve power to local areas, and increase defense spending. Finding savings to fund these priorities without breaking fiscal rules remains a major challenge.

Policy shifts are already underway. Burnham has pushed to end the state pension triple lock, which guarantees rises based on inflation, average earnings, or 2.5%. Welfare reform remains sensitive for the Labour government, especially after previous attempts to cut spending faced strong resistance from lawmakers. On the revenue side, Burnham has not ruled out tax increases. Reports suggest the government may introduce windfall taxes on banks, but lenders have lobbied hard against the idea. JP Morgan boss Jamie Dimon met with Burnham and Healey in London last month to voice sector concerns.

Haldane cautioned against placing excessive tax burdens on businesses. He said the private sector feels heavily taxed and worries that high borrowing will stifle growth. Despite these pressures, Haldane added that the current administration remains significantly underweight in its economic and financial expertise.