4 September 2026: £15bn tax hikes loom as UK borrowing costs hit 1998 highs

Peter Ruis, the outgoing Managing Director of the UK’s pre-eminent department store chain John Lewis, believes the UK is locked into a form of ‘permacrisis’ that is prompting businesses like his to reassess their high-street presence in major towns and cities.

Ruis urged the government not to hike business rates on large retailers, warning that the rumoured tax rise would be “terrible” for the high street.

It is “really, really critical” that Labour does not add to the business rates burden facing high streets, which he said is already “out of kilter”.

Retailers have said in recent days that they fear Andy Burnham could hike the highest business rates bill for the largest retailers to fund tax cuts for smaller shops, pubs and bars.

This tax change would have a “terrible impact for all retailers,” Ruis said. “No-one wants those city centres, those town centres and those high streets to see more closed shops.”

But Ruis said he was “pretty optimistic” that the retailer can manage external trading conditions to deliver a strong Christmas period. The earlier timing of this year’s Budget, at the end of October rather than November as last year, will allow the retailer to focus on the critical end-of-year trading period, he said.

“That critical period for us, where ‘the big day’ out typically happens in John Lewis in those critical November weeks, getting past that Budget hump will be huge for us.”

Surging government borrowing costs have placed immense pressure on Andy Burnham and John Healey ahead of the Budget on 28 October.

Economists are warning that higher debt interest payments have sharply eroded the UK's fiscal headroom, making tax increases or spending cuts of up to £15 billion increasingly likely.

Long-term government borrowing costs surged to multi-decade highs, with 30-year gilt yields climbing to 5.89%, their highest level since 1998. Yields on 10-year gilts also reached levels not seen since 2008. The bond market sell-off, driven by global inflation concerns and energy price spikes, is expected to add billions of pounds to UK debt-servicing costs, with interest on debt projected to reach £135 billion this financial year.

Analysts estimate that the government's fiscal headroom has shrunk from £24 billion to between £10 billion and £15 billion. With Labour committed to not raising income tax, national insurance, and VAT in its 2024 election manifesto, experts believe the Treasury will target wealth, including potential hikes to capital gains tax, changes to inheritance tax, or higher levies on banks and ‘big oil’.

Lord Jim O'Neill, a former economic adviser to Burnham, warned that raising capital gains tax would be "the last thing that should be happening when we want more growth." He cautioned that such an increase "will force even more genuine risk takers to be discouraged."

The City and big business are mobilising to discipline the new government and keep it in line with Treasury economic orthodoxy.

Mr Burnham faced the storm at his first Prime Minister’s Questions and again committed himself to abiding by the Treasury rules so beloved of his predecessor.

He also told MPs he wanted to cut the welfare budget, while backing NATO demands for soaring military spending.

Business leaders queued up to demand action to curb spending, in particular urging an end to the triple lock that protects pensioners’ living standards.

At some point, Burnham will have to say what will happen, rather than what he wants to happen.

Ending the triple lock would reduce the long-term cost of the state pension. Still, it would also lower future pension incomes, increase pensioner poverty, and trigger a major political backlash. Economically, it eases fiscal pressure; politically, it is explosive.

The pound was mixed, moving marginally higher yesterday, with GBP/USD up, GBP/EUR slightly lower, and GBP/JPY sharply weaker.

Federal Reserve governor Christopher Waller said on Thursday that next week's inflation report will largely determine whether he supports an interest rate hike later this month.

The government will release August inflation figures a week from today. If the report shows inflation continues to cool, Waller said he "would be inclined" to keep the Fed's benchmark interest rate unchanged.

"However, if headline inflation rises or core inflation remains elevated, I would consider a rate hike," Waller said. Borrowing costs are only "slightly restricting" consumer and business demand, he added, and it may not take much acceleration in inflation to nudge him into supporting a rate hike.

Waller is an outspoken member of the Fed's seven-person governing board, and his remarks suggest that a rate hike later this month is not a done deal. Stock prices rose, and bond yields fell in response. Several FOMC members have voiced concerns that price increases are still too high, suggesting a rate hike may be needed. Yet others have said inflation is slowly cooling and higher borrowing costs aren't necessary.

Kevin Warsh’s Jackson Hole speech shifted the Federal Reserve’s position from hold unless you have to hike to hike unless you can justify a hold. While macro projections suggest the Fed can afford to be patient, the shift in stance indicates an appetite for a hike to help ensure inflation returns to target. There is no pressure for a September hike to be the first in a series. Were a hike to be delivered on September 16th, it would be considered ‘insurance’ against ‘sticky’ inflation.

US services activity strengthened in August, with both the Institute for Supply Management's and S&P Global's surveys pointing to the fastest pace of expansion in months, as demand, new orders and backlogs picked up across the sector.

The ISM's services PMI rose to 55.4 in August from 54.1 in July, beating expectations and marking the strongest sector expansion in six months, as business activity, new orders, inventories and backlogs all accelerated.

Employment contracted for a second month, and price pressures hit a four-year high, driven by rising petroleum-related costs. Supplier deliveries slowed further, and respondents highlighted tariffs and the Middle East conflict as key supply-chain headwinds.

S&P Global's services purchasing managers index rose to 56.5 in August from 54.6 in July, marking the strongest expansion in private sector activity since late 2020, despite a downward revision from preliminary estimates. S&P's composite PMI held at 56 in August, its highest level in more than four years and up from 54.5 in July, signalling a third straight month of accelerating private sector growth.

August's improvement came even as firms faced rising price pressures, slower supplier deliveries and mixed sentiment amid geopolitical and tariff-related headwinds.

The dollar weakened yesterday, recording a broad USD decline, led by a sharp fall against the Japanese yen and smaller losses against the euro, sterling, and Swiss franc. This was a clear dollar-soft session, driven by easing US Treasury yields and dovish-leaning comments from Federal Reserve officials.

ECB Governing Council member and Bundesbank President Joachim Nagel indicated that the ECB will raise borrowing costs next week, though he remained wary of what comes after.

“Markets are pricing in a probability of close to 100% that we’ll raise interest rates at our September meeting, and I’d say that the markets have a rather good understanding of how we’re likely to respond at this stage,” he told Le Monde in an interview published on Wednesday.

However, he did not commit to further moves, saying that “our meeting-by-meeting approach has served us well and will certainly do so in the future”.

“Beyond that September meeting, however, I’m cautious about giving any specific guidance,” he said. “Oil and gas prices keep fluctuating. Financial markets are highly volatile. Uncertainty remains high. It’s an uncomfortable situation from a monetary-policy perspective.”

Policymakers have widely telegraphed another rate hike next week following a quarter-point move in June. Eurozone inflation jumped to 3.3% in August, data published on Tuesday showed, while the economy is proving more resilient than expected to headwinds, including the war in Iran.

“Inflation isn’t close to our medium-term target,” Nagel said. “It stands at around 3% rather than 2%. And according to the June projections, inflation will only return to 2% over the medium term if interest rates are higher.”

He warned that the likelihood of second-round effects, when inflation spreads to other parts of the economy, including wages, increases when price gains remain elevated for an extended period.

Commenting on the recent increase in global bond yields, Nagel said that it “complicates the situation”.

“Market participants are now demanding higher returns globally because they’re facing numerous uncertainties,” he said. “Within the ECB’s Governing Council, we’re taking these developments into account. The best we can do is focus on our mission: ensuring price stability in the Eurozone.”

ECB executive board member Isabel Schnabel may leave her position before her term ends to take up a role at the International Monetary Fund, German newspaper Handelsblatt reported today. The newspaper cited government and finance ministry sources.

Schnabel’s current term as executive board member is due to run through the end of 2027. An early departure would likely weaken the Central Bank’s hawkish resolve. The departure of other senior members would shift its outlook completely.

If she departs early, Bundesbank President Joachim Nagel would remain the sole German candidate to succeed Christine Lagarde, according to the newspaper.

Eurozone private-sector activity expanded at the same pace in August as in July, according to the latest Purchasing Managers' Index data from S&P Global.

The S&P Global Eurozone Composite PMI Output Index was unchanged at 52.0, matching July's eight-month high. The index remained above the 50.0 threshold separating expansion from contraction and was close to its long-term average of 52.3.

The Services PMI Business Activity Index fell slightly to 51.6 from 51.7 in July, reaching a two-month low.

Southern eurozone economies drove the expansion, with Spain and Italy posting increases in economic activity. Germany posted its fastest rate of growth since March, while France recorded an eighth consecutive monthly contraction.

New orders increased at the same pace as in July, marking the joint-fastest improvement in demand since November 2025.

The Eurozone private sector also recorded its first increase in new export orders in four and a half years, driven by manufacturing.ng.

The Euro strengthened yesterday, with EUR/USD rising, EUR/GBP slightly higher, and EUR/JPY falling sharply amid yen strength.

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