Rachel Reeves will need to tread carefully in her second Autumn Budget on 26 November if she is to keep markets onside and achieve her restated commitment to bring down interest costs, according to Deutsche Bank.
Senior economist Sanjay Raja said the Budget will be judged on five key pillars for the Chancellor, and a successful combination of them could also give the Bank of England more scope to ease monetary policy in future.
At the top of the list is avoiding further big jumps in cash borrowing requirements.
"While many will be keeping an eye on the fiscal headroom, one major litmus test for the Treasury will be how much money bond market participants will need to fork out above and beyond what was announced in the Spring Statement," said Raja.
Reeves' inaugural Budget saw cash borrowing requirements rise by a cumulative £175 billion over the four-year forecast horizon, with the spring seeing a further £93 billion to fund fiscal policy.
The Treasury could instead lean on short-term Treasury bills if extra cash is required, the economist said.
Another pillar is that Reeve's needs to incorporate spending cuts, not just rely on tax rises, which would "give markets confidence that the Government is taking a more holistic approach to achieving a more efficient public sector - adding some positive sentiment to the gilt market".
Relying on tax measures would also push headline inflation higher in the coming year, he said, as index-linked and dutiable items feed through directly into the CPI calculation.
This balancing, known as fiscal consolidation, should be spread evenly across the forecast horizon rather than backloading, he added.
A fourth pillar would be to allow greater fiscal headroom – ideally around 1% of GDP – to reassure markets that periods of volatility would not alone eradicate the fiscal headroom, as has been the case in the past year.
If Reeves maintains her current rule of £10 billion of fiscal headroom amidst an economic backdrop that does not look like becoming any less volatile it would just keep the market laser-focused on UK fiscal policy, Raja said.
"While a 1% target may be ambitious, any efforts to raise the fiscal headroom from current levels we think would go a long way in supporting gilt market sentiment."
Finally, he highlighted the importance of reducing policy uncertainty by sticking to a single fiscal event and forecast each year, avoiding the semi-annual volatility spikes caused by having both autumn and spring updates.