The Chancellor is set for a £60billion Budget shock as rising borrowing costs push up the cost of servicing the ballooning national debt.

As John Healey prepares to outline his tax and spending plans, economists warned debt interest payments will be £8billion to £15billion a year higher than previously expected.

That leaves him facing an interest bill of approaching £700billion over the next five years – almost £60billion more than the Office for Budget Responsibility forecast in March.

The surge in interest payments on the near-£3trillion national debt is a major headache for the Chancellor as it leaves him short of cash to fund other areas such as defence and health.

Healey will seek to reassure financial markets in his speech at the Labour Party conference in Liverpool - while also trying to keep backbench MPs on side. 

Borrowing costs have risen sharply in recent weeks as investors bet interest rates will have to rise to tame rampant inflation fuelled by the Iran war and spike in oil and gas prices.

UK bonds have been hit particularly hard amid concerns that Labour is unwilling to take tough choices on spending – and will instead borrow even more to fund their lavish plans.

The yield on ten-year gilts – a key measure of how much it costs the UK government to borrow – rose above 5.4 per cent again today at close to 19-year highs.

The yield on 30-year gilts is around its highest level since 1998. No other country in the G7 pays so much to borrow.

Official figures last week laid bare the impact of rising borrowing costs on the Government’s finances with debt interest payments hitting a record high of £8.8billion last month – the highest bill for August on record.

That took interest payments on the national debt to £50billion for the first five months of the fiscal year – or £327million a day.

Economists told the Daily Mail worse is to come.

Ruth Gregory, deputy chief UK economist at Capital Economics, said she expects debt interest payments to rise from £122billion this year to £149billion in 2030-31.

That compares with OBR forecasts of a rise from £109billion to £137billion.

In total, Capital Economics believes servicing the national debt will cost £682billion over the five-year period – around £58billion more than pencilled by the OBR.

Andrew Goodwin, chief UK economist at Oxford Economics, said debt interest payments will be ‘a fair bit higher’ than previously thought.

‘We think that debt interest payments are likely to be around £9billion-£10billion higher in each year,’ he said.

The higher cost of servicing the national debt leaves the Chancellor perilously close to breaching his fiscal rules.

It is feared that Mr Healey will raise taxes, rather than cut spending, to make the Budget numbers add up.

Martin Beck, chief economist at WPI Strategy, said his Budget arithmetic has been upended by the surge in borrowing costs on the bond markets.

In March, the OBR figures were based on a ten-year gilt yield of 4.5 per cent. They are now well above 5 per cent. Inflation is also higher while the national debt has swelled by more than expected.

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