Chancellor John Healey faces mounting pressure to raise taxes or cut spending, after soaring borrowing costs linked to the Iran war and weaker economic growth have eroded the Government's fiscal headroom by almost £12 billion. This dramatic squeeze significantly constrains the Chancellor's ability to provide support for growth or cost of living pressures when he delivers his first Budget on 28 October.

KPMG's latest economic outlook indicates Mr Healey will have roughly £12 billion in fiscal headroom this autumn, compared to £23.6 billion forecast in spring. Higher borrowing costs on UK debt account for approximately £9 billion of the reduction, whilst slow growth and expected Office for Budget Responsibility downgrades will reduce headroom by a further £2 billion. Long-term borrowing costs have risen amid a gilt sell-off driven by inflation fears and expectations that interest rates will increase from 3.75% to 4% in November. With the Government committed to not raising taxes on working people, the Chancellor may need to pursue alternative tax measures or spending reductions to restore fiscal space.