Has Rachel Reeves broken her fiscal rules? It’s been speculated for some time now that the Chancellor lost her headroom when borrowing costs surged last month. Capital Economics forecast at the start of the year that Reeves’s limited headroom (about £10 billion) had been wiped out by rising gilt yields. This left the Chancellor in the uncomfortable spot of having to weigh up more tax hikes or serious spending cuts just months after unveiling her first Budget – the kind of tax-hiking Budget she insisted would not be needed again.
Today, the news gets worse. The Office for Budget Responsibility has reportedly downgraded its growth forecast for the UK – squeezing the Chancellor’s headroom further. According to Bloomberg, the fiscal watchdog has handed the Treasury a more bleak economic outlook than its original assessment for the October Budget.
Back then, the figures weren’t great: there were minor revisions upwards for the first two years (from 0.8 per cent to 1.1 per cent in 2025), then downward revisions for the rest of the forecast. That this round of growth forecasts is thought to be worse suggests the Chancellor’s fiscal rules are in real danger of being broken. Borrowing costs may no longer be soaring, but they have settled higher than where the OBR estimated they would. The combination of paying more to service the national debt and even lower economic growth means Reeves may have to act sooner than planned (the Chancellor has committed to one fiscal event a year) in order to stay on the right side of her own rules.
Is there any saving grace to be found? This forecast from the OBR is not the last one to be delivered to the Treasury before Reeves stands up to make her Spring Statement in a month or so's time. In theory, circumstances could change again, giving the Chancellor a better news story to deliver to the Commons at the end of March.
The problem – a big one at that – is that many of the economic indicators are going in the wrong direction. Alongside reporting on the OBR update, Bloomberg Economics also suggests that the economy may have contracted in the final quarter of 2024, after Q3 was revised downwards to show no growth at all. The first estimates will be confirmed by the Office for Budget Responsibility tomorrow, as warnings of a technical recession grow louder.
Even if the UK isn’t sliding into recession, it is firmly in a pattern of stagnation. With no impressive growth figures to speak of, and inflation set to peak at nearly double the Bank’s inflation this year, the only factor holding off the dreaded label of ‘stagnation’ is the UK’s unemployment figures. These figures have long masked the real out-of-work rate, but may start to tick up anyway, as businesses reportedly pull jobs at the same rate as they did during the financial crash.
That’s a lot for Reeves to sort in just over a month, when these figures may well determine if she has to make some painful decisions about tax and spend much sooner than she anticipated.
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