Rachel Reeves has already lost half of her £9.9bn headroom
Chancellor Rachel Reeves has had £5bn wiped off her headroom less than 48 hours after she delivered her Spring Statement, a calculation by Bloomberg Economics has suggested.
Chancellor Reeves has received several warnings from leading economists at the Office for Budget Responsibility (OBR) and the Institute for Fiscal Studies (IFS) that her headroom risks getting obliterated by the autumn.
But Bloomberg Economics’ calculations suggest Reeves has already lost half of her fiscal headroom.
Since the end of the Spring Statement, government borrowing costs have risen with the benchmark 10-year yield rising by as much as eight basis points to 4.81 per cent on Thursday —its highest level since mid-January when a global bond selloff severely impacted Chancellor Rachel Reeves’s fiscal flexibility.
Helen Thomas, founder of Blonde Money, noted that under the OBR’s projections, the headroom would be wiped out if gilt yields were to rise by just 0.6 percentage points. Since the forecast was compiled, yields have risen 0.4 percentage points.
Autumn statement warning
Analysts at the financial services provider said that moves in financial markets on Thursday shed more than half of her £9.9bn of headroom.
“That half the headroom has already been wiped out shows that there’s an awful lot more work to do to shore up the public finances,” said Dan Hanson, chief UK economist at Bloomberg Economics.
“The autumn is shaping up to be another big policy event for the chancellor.”
Bloomberg Economics based its calculation on prices set by financial markets at the end of Thursday’s trading.
The calculation confirms leading economists’ fears as uncertainty surrounding President Donald Trump’s “retaliatory” tariffs and energy prices risks creating a bigger fiscal hole.
Reeves’ headroom was the third-smallest on record, with former Chancellor Jeremy Hunt leaving himself some £30bn of headroom after his Spring and Autumn Budgets.
Many City firms are already preparing for the worst. Economists at Jefferies and Investec have already said further tax rises are coming in Autumn.
Tax band freeze
Speaking at a post-Spring Statement event on Thursday morning, IFS director Paul Johnson warned that the Chancellor may have to extend freezes to income tax and national insurance thresholds beyond 2030.
“There is a good chance that economic and fiscal forecasts will deteriorate significantly between now and an Autumn Budget,” he said.
“If so, she will need to come back for more; which will likely mean raising taxes even further.”
He also said investors should be aware of a possible wealth tax and that speculation could damage Reeves in coming months.
“With no sense of a tax strategy, we have no idea which way the Chancellor might turn,” he said.
Reeves said she was in “intensive discussions” with the Trump administration in a bid to avert the hit of his tariffs.
Her comments came after Trump said he was putting a 25 per cent tariff on all auto imports, jeopardising around £6.4bn worth of trade between the UK and US.