Just 10 days after delivering her first UK budget, Chancellor of the Exchequer Rachel Reeves is already at risk of breaking Labour’s manifesto pledge to hold just one fiscal event a year.
Rising borrowing costs and weaker growth both threaten to wipe out the £9.9bn ($12.8bn) of headroom Reeves has against her “stability rule” that day-to-day spending must be paid out of taxes in 2029-30.
If the Office for Budget Responsibility, the UK’s fiscal watchdog, concludes the chancellor is set to break her rules at its update in spring, Reeves will respond with tax rises or spending cuts, according to a person familiar with the situation, who spoke on condition of anonymity about government thinking.
It’s an unenviable position for Reeves, who has promised to restore stability to the management of the UK economy after what she’s described as the chaos under successive previous Conservative administrations. Part of that was the pledge to give businesses and households more certainty and stability by making tax changes just once a year.
The market reaction to last week’s budget underlined the risk the chancellor is carrying. Investors repositioned their portfolios to reflect £142bn of additional borrowing, leading to a spike in government bond yields that wiped out the margin Reeves had against her stability rule.
Andrew Goodwin, chief UK economist at Oxford Economics, said Reeves took a gamble by leaving herself less fiscal space than almost every chancellor since 2010. “If you leave yourself with very little headroom, you leave yourself a hostage to fortune,” he said. “There was always a risk of this.”
Borrowing costs are 0.3 percentage points higher than forecast by the OBR at the budget on October 30, which the watchdog said would remove her entire fiscal buffer. A growth downgrade poses another threat. Goldman Sachs this week cut its UK forecast for next year to 1.4% from 1.6% after Donald Trump won the US presidential election, because of the risk of a renewed trade war if he implements election pledges to levy tariffs on imports.
The OBR’s forecast for 2% growth next year was already far more optimistic than Goldman Sachs and the consensus of other economists. Next week’s official third quarter GDP figures are expected to disappoint. Economists forecast growth to slow to just 0.2% from 0.5% the previous quarter, according to the median of responses collected by Bloomberg. The Bank of England expects growth of less than 0.4% a quarter on average over the next few years.
The Treasury said the OBR forecasts show the government is on course to deliver the biggest current-budget surplus in over 20 years. “The chancellor has been clear that fiscal stability is the bedrock of this government’s economic plans,” it said in a statement, declining to comment on future forecasts.
Reeves has built a safeguard into her fiscal rules to avoid having to return to Parliament for more money, but it will not apply until 2026-27. From then on, she will be able to run a deficit of up to 0.5% of GDP, about £15bn, to “support the government’s commitment to a single fiscal event every year by avoiding the need for policy adjustment at forecasts outside of fiscal events,” according to budget documents.
The buffer is triggered once 2029-30 becomes the third year of the forecast, at which point the binding year will roll forward annually. It will not apply next year and, as a result, Reeves faces the prospect of having to come back with measures to bring in more money, turning the OBR’s forecast into another policy event despite promising in the Labour manifesto just “one major fiscal event a year” to “stop the chaos with a strategic approach that gives certainty and allows long-term planning.”
Reeves has also signalled that next year’s spending review, for 2026-27 and 2027-28, will not come alongside the OBR’s forecast. It will be in “late spring,” she said at the budget, which suggests April or May. The OBR must produce its outlook before the end of March. Reeves will set out each department’s spending budget at the review.
UK Chancellor of the Exchequer Rachel Reeves.
