Government ‘would breach fiscal rules with minor rate rise’
The Chancellor would be in breach of her own fiscal rules if interest rates remain just 30 basis points higher than the fiscal watchdog forecasts, Office for Budget Responsibility (OBR) economists have said.
Giving evidence to the Treasury Committee, OBR member Tom Josephs told MPs that his colleagues conducted analysis that found “a change of the effective interest rate of 0.3 per cent…” was all that was needed for Rachel Reeves to break her pledges.
“A one percentage point increase in interest rates adds about £16bn or so to borrowing,” Josephs added.
The Chancellor chose to ramp up borrowing and spending by up to £70bn each year at last week’s Budget, leaving just £10bn of fiscal headroom to achieve her commitment to balance day-to-day spending by 2029.
The decision to juice borrowing and spending led the interest on UK government bonds – known as gilts – to jump to 4.49 per cent.
The rise took gilt yields – the interest applied to UK government borrowing – to the highest they have been this year, after markets priced in the larger supply of government bonds and a higher amount of borrowing.
The surge in yields led to speculation that the market response was a sign of a lack of confidence in the government’s decision-making.
Analysts at Bloomberg Intelligence wrote on Monday that Reeves should be “thankful” that she avoided a Truss-style market crisis, but others have disagreed with any comparisons to the ignominious 2022 mini-budget.
OBR chair Richard Hughes looked to play down markets’ reaction to the Budget at the hearing, telling the committee: “To a large extent the gilt market response was just a response to higher volumes – if there are more gilts on the market that drives down the price.”
Hughes added that the front-loaded nature of spending in the Budget, which accounted for the vast majority of expenditure hikes to come in the first full year of the parliament, will have also taken markets off guard.
Separately, the panel of officials, comprising Hughes, Josephs and Professor David Miles, also branded the breakdown of communication between the OBR and the previous Treasury administration at this year’s Spring Budget as a “systemic failure”.
“[The Treasury] did not provide all the information that we require to do our forecast,” Hughes said. “In this case, this was a material amount of information, which would have made for a materially different forecast had we had it.”