LONDON: 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 £9.9bil (US$12.8bil) of headroom Reeves has against her “stability rule” that day-to-day spending must be paid out of taxes in 2029 to 2030.
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 £142bil 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 Office for Budget Responsibility at the budget on Oct 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. — Bloomberg
