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Chancellor Rachel Reeves is ratcheting up her plans for tax rises and spending cuts in next month’s Budget in order to create billions of pounds of extra fiscal “headroom” for the Treasury against future economic shocks.

She believes that making painful decisions this autumn could prevent her from having to come back again with more tax rises later in this parliament, according to her allies. 

But the decision could mean political pain for Reeves, given that she had promised that last year’s Budget — which raised £40bn in taxes — was a one-off. 

At the October Budget and the March Spring Statement the chancellor left herself just £9.9bn of margin against her key borrowing rule, which requires her to bring the current budget — which excludes investment — into surplus by 2029-30.

Pimco and BlackRock, two of the world’s biggest bond investors, have urged Reeves to build a larger fiscal buffer into the UK’s public finances.

“If you have to drive from here to somewhere 50 miles away, don’t have 50 miles worth of petrol,” said Andrew Balls, Pimco’s chief investment officer for global fixed income. 

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One industry figure said senior Treasury insiders had been considering going as far as doubling or tripling the existing buffer.

“The idea is to get the difficult decisions out of the way now and not have to keep coming back every year with more tax rises,” they said. 

One Treasury official confirmed that “we are looking to increase the buffer”, although he said he did not recognise the idea of it doubling or tripling.

Having such a thin margin has left the government at risk of breaching its own fiscal rules, which could push up gilt yields — increasing the cost of borrowing for the government. 

Michael Saunders, senior adviser at Oxford Economics, said that having a greater amount of headroom could push down gilt yields by increasing the credibility of the government’s fiscal plans.

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Analysts widely expect Reeves to announce big tax rises in the Budget as a productivity downgrade from the Office for Budget Responsibility opens up a fresh hole in the public finances.

They estimate Reeves will be confronted with a hole of £20bn to £30bn because of the productivity downgrade by the UK fiscal watchdog. 

The Treasury has now received the first private forecast from the OBR and is debating the shape and scale of tax increases.

Officials are also looking for public sector savings as they attempt to cut borrowing, according to people familiar with the process.  

Yields on 10-year UK government gilts have risen from 4.2 per cent to 4.7 per cent since Labour won the 2024 general election.

However officials insisted this was not unique to the UK and that gilt yields have drifted upwards in other western nations over the past 15 months.