Chancellor Rachel Reeves’ fiscal rules on a ‘knife edge’
According to an influential think tank, the chance that the Chancellor will meet her fiscal rules remains on a “knife edge” even though borrowing costs have edged lower in recent weeks.
The Resolution Foundation warned that Rachel Reeves may be forced to find some extra cash through tax increases. Alternatively, she might consider spending cuts. Otherwise, she could face “market jitters“.
Reeves left a buffer of just under £10bn in October to meet her key fiscal rule, which requires day-to-day spending to be met by tax receipts.
A sell-off in the gilt market earlier in January put this rule under pressure, with yields rising to their highest levels in decades. The pound also suffered, bringing back unwelcome memories of the market reaction to Liz Truss’ mini-budget.
The market rout was largely a result of international factors, in particular changing bets on US interest rates, and gilts have recovered all of their ground since the turn of the year.
However, yields still remain 0.5 percentage points higher than the Office for Budget Responsibility (OBR) projected last autumn.
Should yields remain at this level, this would put up the cost of servicing debt by around £7bn a year, according to the Foundation.
“While other factors will also affect the OBR’s forecast, the chance of the Chancellor falling foul of her fiscal rules remains on a knife edge,” James Smith, research director at the think tank said.
“Tough short-term decisions, including fresh tax rises or spending cuts, may also be needed in the coming weeks to demonstrate her commitment to sustainable public finances,” he added.
In her growth speech in Oxford yesterday, Reeves confirmed that the fiscal rules are “non-negotiable” and “will always be met”, but said it was unclear exactly what the OBR’s forecasts would contain.
“There’s still two months off. A lot of things can happen in that time so I’m not going to give a running commentary on the March 26 forecasts,” she said.