John Healey will set his fiscal headroom at a minimum of £15bn, City analysts have predicted, although closer attention will be paid to the Chancellor’s spending restraint.
Economists at major banks are anticipating Healey’s buffer against the main fiscal rule to shrink slightly. The borrowing rule states that day-to-day government spending should at least match projected tax receipts by 2030.
Top economists have said the Office for Budget Responsibility, the independent forecaster whose calculations determine whether the Chancellor has a grip over public finances, will list a number of costs from higher borrowing in part due to the Iran war.
At this year’s Spring Statement, former Chancellor Rachel Reeves’ buffer stood at £23.6bn, although the estimate was calculated before the US and Israel launched strikes in Iran, which led to significant trade disruption of oil and gas across the Gulf region.
While higher earnings forecasts and extra income from the energy profit levy and general taxation could drive receipts, the heavy costs from higher debt interest payments, spending commitments on defence and rising inflation means Healey is heading into the Budget with the headroom standing at closer to £10bn, according to Deutsche Bank and UBS.
Healey’s headroom ‘less of a focus’
Researchers at Deutsche Bank said a collection of taxes on online retailers, gambling, banking profits and narrowing the tax gap means Healey is set for tax rises worth around £5bn at the Budget.
“Modest tax rises and efficiency savings, we think, will bring the Chancellor’s primary headroom to £15.7bn,” the bank’s UK economist Sanjay Raja said.
However, he added that markets would view Budget measures cautiously as they wait for further announcements on defence spending and departmental cuts over the next year. The government is tasked with spending about £11bn more each year if it wishes to lift military funding to three per cent of GDP by 2030, while higher inflation is expected to weaken the value of public expenditure.
“While the public finances will have taken a modest hit relative to the Spring Statement, markets will be less focused on the headline measures announced on Budget Day and more focused on what they signal about the road ahead,” Raja noted.
“Put simply, can the Chancellor provide households and businesses with some breathing space today, while convincing investors that the much bigger spending decisions that loom next year will be funded responsibly?”
Healey is also expected to announce temporary measures on the cost of living, including extending a freeze on fuel duty, providing a warm homes discount to millions of households and offering businesses some support with costs on employment and energy.
Morgan Stanley’s UK economist Bruna Skarica said the headroom figure would be “less of a focus” for the bond markets as investors “zoomed in more on the perceived plausibility of the fiscal plan and any near-term borrowing increases which might be presented as one-offs and temporary, but seen by the market as permanent”.
Pantheon Macroeconomics analysts Rob Wood and Elliott Jordan-Doak told market clients in a note that “less headroom and kicking tough decisions on defence and other spending into the long grass” could push up gilt yields after the fiscal statement.
“Avoiding addressing known spending pressures now undercuts the credibility of planned fiscal consolidation,”
“Markets would need to believe that a government politically unwilling, or unable, to tighten now could deliver even larger consolidation immediately before an election.”