UK Government Bond 30Y

UK Chancellor John Healey is preparing a cautious first budget to maintain market confidence as the Iran war, higher borrowing costs, and government spending commitments squeeze Britain's public finances, Bloomberg reported Saturday. Healey is expected to favor relatively modest measures in his Oct. 28 budget as Prime Minister Andy Burnham's government seeks to avoid unsettling investors or repeating the large tax increases introduced under former Chancellor Rachel Reeves. The chancellor has made fiscal discipline a priority and wants government spending announcements to identify how they will be funded. Britain's fiscal position has weakened since Burnham took office, with Healey inheriting £23.6 billion ($31.9 billion) of headroom against the government's borrowing rule, but higher debt-servicing costs and new spending commitments are estimated to have reduced that buffer by about £9 billion. Long-term government borrowing costs have remained relatively stable since Healey's appointment, with the yield on 30-year UK government debt rising to around 5.79% from 5.75%. Potential revenue-raising measures under discussion include higher taxes on banks following strong recent profits, and Treasury officials have also considered increasing taxes on windfall profits at fossil fuel companies after BP more than doubled its profit between April and June amid elevated oil prices. Healey is separately examining whether Britain's fiscal rules provide room for increased infrastructure borrowing, although officials are wary of triggering a negative reaction in bond markets. The government faces other major spending pressures, including welfare and defense, with plans to raise defense expenditure to 3.5% of gross domestic product expected to be addressed in the government's 2027 spending review rather than the October budget. Healey has yet to commit publicly to spending 3% of GDP on defense by 2030, up from around 2.6% currently, which would require at least another £10 billion. The budget will be Healey's first major fiscal test since becoming chancellor and comes as Labour seeks to preserve its recent recovery in opinion polls.