October Budget, Spend, Borrow, Tax?
October Budget, Spend, Borrow, Tax?
The Government is preparing for the Budget on the 28th October, the Chancellor faces a problem that cannot be solved by presentation alone, what will it be in the October Budget, Spend, Borrow, Tax?
Government spending remains high, economic growth is subdued, borrowing is continuing and the cost of servicing the national debt has risen sharply. The Government has only four realistic choices:
Spend less
Borrow more
Tax more
Use a combination of all three
None of these will be a painless option. Each choice has consequences for households, businesses and the wider economy and each could increase the costs to the public.
The Starting Position
The scale of the challenge is considerable.
At the end of July 2026, public-sector net debt stood at approximately £2.985 trillion and borrowing has continued.
The cost of carrying this debt is equally important. The Government’s own 2025 Budget document, acknowledged that servicing these debt costs, had exceeded £100 billion in each of the previous two financial years. This is money which cannot then be spent on the NHS, education, defence, policing or infrastructure.
The financial markets are also demanding a higher return for lending to the UK. In September, the yield on ten-year government bonds reached approximately 5.4%, while the yield on thirty-year gilts approached 5.9%, levels not seen for many years.
The Government cannot therefore assume that the markets will fund unlimited additional spending at a rate it can afford.
So, let’s consider the options.
Option 1: Spend Less
The most direct way to reduce borrowing without increasing taxes is to reduce or slow the growth of public spending.
This would involve:
Reducing departmental budgets
Reforming welfare and public-sector pensions
Limiting public-sector pay increases
Cancelling or delaying infrastructure projects
Cutting grants, subsidies and overseas expenditure
Improving public sector productivity and reducing administrative costs
In theory, genuine efficiency savings should allow the Government to provide the same services at a lower cost. Few people would object to eliminating waste, duplication, fraud or poorly performing programmes.
The difficulty is that “efficiency savings” within the public sector rarely produce what they set out to achieve.
The perceived impact would be immediate. Longer NHS waiting times, fewer local services, reduced transport investment and tighter welfare rules would be described as austerity, even if total spending continued to rise more slowly rather than falling outright.
Spending reductions can also transfer costs, instead of eliminating them. Here’s a few examples:
If social-care provision is restricted, families may have to pay privately.
If local authority funding is reduced, council tax, parking charges and other fees may rise.
If public investment is postponed, businesses may continue to bear the cost of inadequate roads, housing, energy infrastructure and public transport.
If not managed correctly, it will simply move the cost from the Government’s balance sheet onto households and businesses.
Option 2: Borrow More
Borrowing allows the Government to maintain services and investment without imposing immediate tax increases.
There is a sound economic argument for borrowing to finance productive assets. Investing in Infrastructure, energy projects, housing and technology can increase the economy’s future capacity and potentially, generate a return greater than their financing cost.
However, borrowing to meet continuing day-to-day expenditure is extremely difficult to justify and maintain. It passes today’s bills to future taxpayers, without necessarily creating any assets or additional income in future years to repay the debt!
If gilt yields remain the same/increase, this does not affect only the Treasury, these higher bond yields, influence the wider cost of money across the entire economy, feeding into:
More expensive mortgages
Higher borrowing costs
Lower bond and pension-fund values
Greater interest costs on future government borrowing
So, more borrowing could avoid any immediate tax increases, but it will create a larger bill later, but governments do have a habit of kicking the can down the road, so they become other people’s problems later.
This could decrease market confidence, by indicating the Government lacks control of routine expenditure and investors will likely demand a higher interest rate, for the additional risk they are taking.
Option 3: Tax More
The Government could attempt to close the gap by increasing revenue, that means higher or additional new taxes to fill the gap!
Its track record suggests that taxation will form at least part of the answer, if not more.
The October 2024 Budget they:
Increased employer National Insurance
Reduced the threshold at which employers began paying it
Capital Gains Tax rates were increased
The 2025 Budget continued that theme and introduced further measures affecting:
Property
Dividends
Savings
Pension salary sacrifice and tax thresholds.
Further tax increases would bring in revenue, more quickly, than many try and spend less plans, but they carry economic consequences.
Taxes on employment increases the cost of hiring people. Businesses may respond by reducing recruitment, limiting pay rises, increasing prices or accepting lower profits (probably not).
Taxes on investment and capital can discourage transactions, change behaviour and sometimes raise less than forecast. Higher property taxes affect mobility, while higher taxes on savings, dividends and pensions can discourage long-term savings/investments.
Freezing allowances and thresholds are politically less visible than increasing headline tax rates, but it is still a tax rise, increasing tax on wages, pensions and asset values. This “fiscal drag” gradually brings more people into tax and pushes existing taxpayers into higher bands.
Taxing more does not mean that the cost is necessarily borne only by the person or company named in the legislation. Businesses pass costs on where they can, Landlords increase rents, employers may restrain wages/increases, investors require higher returns and consumers will ultimately pay higher prices.
Option 4: A Combination
The most likely outcome is a mixture of spending less, additional borrowing and further tax increases.
Politically, this allows the Government to argue that the burden is being shared. Economically, it avoids relying too heavily on any single measure, but unfortunately it risks creating the cumulative effect of higher taxes, weaker services and continued borrowing.
A credible package would need to show a clean gap between investment and ordinary day to day expenditure.
The markets will examine whether the figures add up, the savings are deliverable and the economic assumptions are realistic. Simply moving costs into later years or relying on optimistic growth forecasts, is unlikely to provide lasting reassurance and we have very recent past performance, through which to view this.
The Government’s Record Matters
Since 2024, the Government has chosen to increase public spending and investment while raising substantial additional tax revenue. Despite those increases, borrowing has remained stubbornly high, and expenditure has continued to increase in several important areas.
The Government’s own 2025 Budget stated that the UK had the highest borrowing costs in the G7. It also showed weaker productivity forecasts had reduced expected tax revenues, while welfare spending and debt-interest costs had spiralled.
This creates a vicious cycle. Higher spending requires more tax or borrowing. Higher borrowing increases debt interest. Higher taxes reduce investment and growth and weaker growth, makes it more difficult to raise revenue without increasing taxes again!
Breaking that cycle requires more than another series of tax rises. It requires spending discipline, productivity improvements and a credible plan for sustainable economic growth.
The Cost Will Ultimately Reach The Public
Whether they spend less, borrow more or tax more, the public are going to feel the effect.
Spending cuts will reduce services and increase private costs. Borrowing will mean higher interest bills, mortgage rates and future taxes. Tax increases will reduce disposable income, investment and business confidence will decrease and all this contributes to higher prices.
The real question for the October Budget is therefore not whether there will be a cost, but on whom that cost will fall, when it will be paid and whether the measures announced will improve the country’s long-term financial position. If it does not, it will merely postpone the next difficult decision and tax rises. The vicious cycle continues.
For individuals, families and business owners, waiting until measures have already taken effect can restrict the planning opportunities available. Reviewing income, investments, pensions, property and estate-planning arrangements before and immediately after the Budget can help identify where changes may affect you.
Klarity Tax will be reviewing the announcements in detail and explaining what they mean in practical terms.
Other Articles that May be of Interest: The 2027 Pension Shocker | Burnsham Tax Agenda
