Despite the Chancellor’s £40bn Autumn Budget already falling largely on the shoulders of businesses, they could face further tax revisions this year. According to Deutsche Bank “big revisions” to the Office for Budget Responsibility’s (OBR) macroeconomic projections are expected in the spring statement, says Deutsche Bank.
“The forthcoming Spring Statement, Spending Review, and Autumn Budget will likely be painful sequels to the chancellor’s historic inaugural budget,” explains Sanjay Raja, Senior Economist, Deutsche Bank.
City analysts warn that Britain’s long-term borrowing costs have eaten into the Chancellor’s £10bn budget buffer, moving the chancellor closer to breaking her fiscal rules by either calling for restraint on spending or announcing further tax rises. City analysts are speculating on the latter.
“Gilt yields have continued to rise sharply to start the year. So even before the OBR can put pen to paper, Chancellor Reeves has a big problem. The razor-thin headroom left in the Autumn Budget has likely all evaporated,” says Raja.
The yield (interest rate) on the UK’s 30 year debt, has risen 5.3% – the highest level in 27 years. Paired with the rising yields, flatlining growth, inflation stubbornly above the Bank of England’s 2% target, falling sterling and poor GDP figures, interest rate cuts in the next 12 months are looking unlikely. Corrective measures by the Chancellor may therefore be on the cards.
The next official fiscal forecasts are due on the 26th of March when Rachel Reeves will deliver a budget update speech to parliament. The Chancellor has said that she wanted to limit big fiscal events to one a year to give families and businesses more stability, but without the required wriggle room, the government is under increasing pressure to pursue corrective action, which would mean breaking their fiscal rules.
“What does this mean for the fiscal outlook? Spending cuts, more borrowing, and likely a little more taxation to close the emerging fiscal hole,” says Raja.