Key points: The UK is about to unveil a critical autumn budget, and a former chief economist of the Bank of England has warned that the country is currently "walking on thin ice."

UK Prime Minister Andy Burnham and Chancellor of the Exchequer John Healey will set out a full package of fiscal policies in the autumn budget later this month.

In an interview, the former Bank of England chief economist said that ahead of the crucial autumn budget, the UK is "walking on thin ice," and he warned the government must control public spending while avoiding large tax increases that would harm the economy.

Andy Haldane, who served on the Bank of England's Monetary Policy Committee until 2021, told reporter Steve Sedgwick that the budget update scheduled for release on October 28 carries multiple risks.

Speaking on the sidelines of the "How Britain Grows" conference hosted by Goldman Sachs' "10,000 Small Businesses UK" program, Haldane said: "The truth is, fiscally, we are walking on thin ice. Whether economically or politically, the worst outcome is the ice cracking beneath our feet."

Asked whether the metaphorical "ice" could crack, he responded that the risk is real.

He added that the "most effective way" to avoid that risk is for the government to send a signal to financial markets that it is capable and willing to sharply cut public spending in order to reassure them.

Haldane said: "That is this government's Achilles' heel. Unless there is real action on this, unfortunately, Prime Minister Andy Burnham will still be at the mercy of the bond market."

This summer, Burnham succeeded Keir Starmer as UK prime minister, after previously arguing that UK fiscal policy is constrained by bond traders.

Earlier this year, news that Burnham was expected to challenge Starmer and become a leading Labour Party contender already rattled the bond market, with investors viewing Burnham's policy stance as far more left-wing than his predecessor.

Affected by a mix of domestic and global instability, UK government bond (gilt) yields have surged sharply in recent years, and the UK is currently the G7 country with the highest government borrowing costs.

A snapshot of 30-year government bond yields across countries shows Canada at 4.303%, Germany at 3.8254%, France at 5.2967%, Italy at 5.1127%, Japan at 4.223%, the UK at 5.8848%, and the United States at 5.633%.

History is not on our side

Haldane noted that the international bond market has created a harsh environment for all sovereign borrowers, but the UK has been hit especially hard, as its economy is highly dependent on the global external environment and is highly leveraged.

"We have higher domestic inflation, and it is quite sticky; economic growth is sluggish and equally hard to improve. This century, we have never managed to balance the fiscal books. So history is not on our side, and the reality data is not on our side either. That is the root of why we are walking on thin ice."

The UK pension system operates under a "triple lock" mechanism, under which the state pension rises by the highest of inflation, average wage growth, or 2.5%.

Haldane commented that Burnham's push for reform to break that mechanism is a "good first step."

But he also mentioned that the issue of welfare spending remains a highly symbolic and sensitive topic for the ruling Labour Party and for the bond market.

Last year, Starmer government finance minister Rachel Reeves originally planned to cut welfare spending, but the plan was shelved after collective opposition from Labour backbenchers, and the gilt market came under pressure immediately afterward.

This upcoming autumn budget is the first budget of Burnham's cabinet.

Chancellor of the Exchequer John Healey said last month that he hopes to build fiscal buffers to cope with future uncertainty.

Healey's core task now is to control public spending and the scale of government borrowing.

Persistently high and sticky inflation, elevated borrowing costs, and weak economic growth are all making fiscal balance increasingly urgent.

But Burnham and Healey have also said that lowering people's living costs, devolving power to local governments, and increasing defense spending are all priority policy goals.

Although the government has already found some savings to support defense plans, the two have not yet fully explained what further savings measures or tax adjustments will be needed to cover new spending while adhering to the country's fiscal rules.

Burnham has not ruled out tax increases, and UK media have reported that a windfall tax on banks is already under consideration.

Major banking institutions operating in the UK oppose the proposal.

JPMorgan Chairman Jamie Dimon met with Burnham and Healey in London last month to discuss the matter.

In the interview, Haldane cautioned that the budget should not target businesses.

"Most people would agree that the private sector is the core engine of economic growth. But the private sector now widely feels that the tax burden is already too heavy. The market widely believes that UK government borrowing is not too low, but too high. So continuing old policies will not bring economic growth. I hope the government will gradually recognize this internally."

However, Haldane added that this government clearly lacks sufficient expertise in economics and finance.