Reeves faces tough choices as recession fears mount on UK downgrade
The fiscal watchdog has cut its growth forecasts, according to reports, which would force Chancellor Rachel Reeves to hike taxes or cut spending next month.
The Office for Budget Responsibility’s (OBR) preliminary projections, given to the Treasury last week, suggest that sluggish growth and higher borrowing costs have wiped out the Chancellor’s headroom.
The watchdog will put together four more forecasts in the coming weeks, but the earliest draft suggests that Reeves will be facing a small deficit in March, Bloomberg reported.
Reeves left herself a buffer of just £9.9bn in October to stay on the right side of her key fiscal rule, which requires day-to-day spending to be funded by tax receipts.
But growth significantly undershot expectations in the second half of last year, which has a major knock-on impact on government tax receipts.
Measures of business and consumer confidence have nosedived in the face of higher taxes and gloomy government messaging.
New figures out tomorrow are expected to show that the economy contracted 0.1 per cent in the final quarter of last year, leaving the UK at risk of recession.
“The evidence is growing that corporate sentiment and household demand is falling rapidly, leading to an ever-increasing risk of a UK recession,” Roger Lee, head of equity strategy at Cavendish said.
Can Britain avoid a recession?
Reflecting the poor performance of the economy, many analysts have slashed their forecasts in recent weeks.
Having projected growth of 1.5 per cent back in November, the Bank of England halved its forecasts to just 0.7 per cent last week.
The OBR was already much more optimistic than many forecasters, predicting in its most recent round of forecasts that the economy would grow 2.0 per cent in 2025.
Government borrowing costs are also higher than in October, despite the recent recovery in bond markets, which will add to the Treasury’s spending bill.
Reports suggest that Reeves is likely to opt for spending cuts to balance the books in March, but further tax rises might be on the cards in the autumn.
Shadow Chancellor Mel Stride said “this is a situation entirely of the Chancellor’s own making,” adding, “lower growth means lower tax revenues.”
He warned that “the Chancellor made us vulnerable by ramping up spending and borrowing. She made a promise not to raise taxes even further. Let’s see if she keeps it.”
Asked about the growth downgrades, the Prime Minister’s official spokesperson said “I’m not going to get ahead of the OBR’s forecast”.
“Growth is the number one mission of the economy and that’s why recently the government has announced plans to bring forward a third runway at Heathrow, to cut nuclear regulation to deliver SMRs, jobs and cheaper bills, and unveiled plans to unleash the potential of the Oxford-Cambridge growth corridor,” they added.
Speaking at the Treasury Committee this afternoon, James Bowler, permanent secretary to the Treasury, said officials would be following up the Bloomberg story as a “potential leak”.
“It is important to put a ring around these forecasts and make sure they’re not in the public domain,” he said.
“The reason for that is OBR officials and ministers need to interact as new information becomes available and they need to do so in privately,” Bowler added.