Letter from the Editor: The Chancellor’s debt problem – and how it could affect you  

With the Autumn Budget now just weeks away, speculation is mounting about what could be announced — from changes to income tax and pensions to possible reforms affecting wealth and inheritance.

But behind all the rumours is a much bigger issue: government debt.

What’s the issue?

New figures suggest the government faces a £60bn shortfall in the Budget purely from the rising cost of servicing UK national debt. That’s before a single new spending pledge is priced in.

The UK is carrying almost £3 trillion of public debt, and the cost of servicing that debt has become a significant expense. In 2025/26, the Government spent around £109 billion on debt interest. That’s equivalent to around 8% of total public spending.

And recent figures suggest the pressure is rising. Government borrowing reached £18.3 billion in August, £3.5 billion more than the OBR had forecast, taking borrowing for the financial year so far to £77.3 billion — £8.1 billion above the official forecast.

Why should this matter to you?

When the Government has less ‘fiscal headroom’ (less money to spend), decisions made in the Budget can have a more direct impact on your own finances because the Government has to start looking at bigger measures to balance the books.

That could mean changes to tax allowances, pension rules, inheritance tax, benefits and other measures designed to raise or save money.

There is already considerable speculation about possible changes to pension tax relief and the amount of pension savings people can take tax-free. But as the Pensions Minister commented today, these are just rumours; nothing yet is a confirmed Budget announcement.

The Chancellor will not be keen to increase the amount of borrowing he has to do, as he’ll be acutely aware that big spending announcements that are funded by borrowing will increase those growing monthly debt payments. And the trouble is, they’re increasing even without new spending promises being made.

Why? The Government raises money by borrowing from investors. It does this by selling bonds called gilts — essentially IOUs that promise to pay investors interest in return for lending the Government money.

A gilt yield is the effective return an investor gets from holding one of these government bonds. If gilt yields rise, it generally means the Government has to offer investors a higher return to persuade them to lend money. That can make borrowing more expensive for the Government.

UK borrowing costs have been elevated this year. In September, the Government sold 30-year gilts at a yield of 5.82%, the highest level recorded in data going back to 1998.

But what might cause gilt yields rise in the first place? There are several reasons. Investors may demand a higher return if they think inflation will stay high, interest rates will remain higher for longer, or they are concerned about the Government’s finances and how much it needs to borrow. If there is a lot of government debt being issued, investors may also demand a higher yield to buy it.

This matters because the Government has a huge amount of existing debt. As some of that debt reaches the end of its term and needs to be replaced with new borrowing, higher interest rates can mean the Government has to pay more to borrow the money again.

What can you do?

You can’t control what the Chancellor announces. But you can make sure you’re not caught completely off guard.

If you’re worried about possible tax or pension changes, now could be a good time to look at your own finances and ask:

• How much tax do I currently pay, and which allowances do I rely on?
• How much do I have in pensions, ISAs and other savings?
• Would a change to pension tax relief or tax-free withdrawals affect me?
• Could changes to inheritance tax affect my estate or my family’s finances?
• Do I have enough cash available if my household costs rise?

You don’t need to make big changes simply because there are rumours about what might be in the Budget. In fact, acting on speculation can sometimes leave you worse off — particularly with long-term investments and pensions.

Instead, understanding where you stand now means that, when the Chancellor makes the announcements on 28 October, you’ll be in a much better position to work out what they actually mean for you.