KPMG Warns UK Budget Will Be Tight, Leaving Chancellor with Limited Options

A fresh KPMG economic outlook has revealed that Chancellor John Healey will enter next month’s Budget with a markedly slimmer fiscal cushion, forcing a choice between higher taxes or deeper spending cuts.

The report projects that the government’s fiscal headroom will shrink from £23.6 billion, as forecast in the spring, to just £12 billion by the autumn. Rising borrowing costs – a fallout of the Iran conflict and a sell‑off in gilt markets – have already eroded roughly £9 billion of that margin, while anticipated downgrades from the Office for Budget Responsibility are expected to trim another £2 billion.

"The Chancellor will have limited scope to deliver significant support for growth or the cost of living when the Budget is presented," KPMG warned. It added that restoring the former level of headroom would likely require either tax increases or spending reductions, noting that the government has pledged not to raise taxes on working people.

Long‑term borrowing costs are on the rise, driven by inflation concerns linked to the Iran war and expectations of higher interest rates by year‑end. KPMG forecasts UK rates to climb from 3.75 % to 4 % in November, before easing back next summer as the energy‑price impact on inflation subsides.

Inflation is projected to rise to 3.5 % in the autumn, peaking at about 4 % in the first quarter of next year. Economic growth is expected to slow to 1.3 % in 2026, with a modest uptick to 1.4 % next year.

In short, the Budget will be delivered with a tight fiscal stance, leaving the Chancellor with few options to bolster growth or ease the cost of living without resorting to tax hikes or spending cuts.