The Resolution Foundation has issued a warning that elevated government borrowing costs could lead to necessary tax increases or spending cuts to comply with fiscal regulations.

Despite efforts to manage finances, the risk of breaching fiscal rules remains significant due to persistently high borrowing costs.

To align with its commitment of not exceeding its tax revenue, the government may need to implement higher taxes or budget cuts.

In response to economic challenges, Chancellor Rachel Reeves has announced plans to stimulate growth through infrastructure projects, including a proposed third runway at Heathrow.

Chancellor Reeves has also directed government departments to identify 5% 'efficiency savings' as they prepare their budgets for the upcoming years.

Economists have noted that the rise in borrowing costs is partly due to slow economic growth in the UK.

Currently, the government is facing an additional £7 billion per year in interest payments on its debt compared to the last Budget.

However, it is worth noting that borrowing levels have decreased since reaching their peak earlier in January 2025.

Prime Minister Sir Keir Starmer has not ruled out the possibility of further tax increases, acknowledging potential unforeseen challenges ahead.

The increase in government borrowing costs has been influenced by international factors, particularly rising debt levels in the US and Europe.

James Smith, research director at the Resolution Foundation, stressed the importance of Chancellor Reeves adhering to fiscal rules to prevent market instability.

A Treasury spokesperson has reiterated that the government's commitment to its fiscal rules is 'non-negotiable,' emphasizing the seriousness of the situation.

As part of its budget preparations, the government is actively seeking to reduce 'waste' and has indicated that tax increases remain a possibility.