By Andy Bruce
Oct 15 (Reuters) – British finance minister John Healey should rebuild his depleted headroom against the fiscal rules to about £15-16 billion ($20-21 billion) at this month’s budget to keep bond investors onside, a Reuters poll of economists showed on Thursday.
Headroom, the buffer by which the government’s current tax and spending plans meet its fiscal rules, has halved since the March fiscal update to around £10-12 billion from £23.6 billion, the poll’s median forecast showed.
But some of the 19 economists surveyed, from large banks and consultancies, put headroom as low as £5 billion, reflecting uncertainty over how the Office for Budget Responsibility will score the many factors that feed into its calculations.
The government’s stability rule requires it to balance the current budget, meaning day-to-day spending against revenue, by 2029/30 — something it has achieved only fleetingly in the past 25 years.
Healey, who has again pledged to meet the fiscal rules in full, presents his budget on October 28. He said on Thursday he wanted it to give households some “breathing space”, and economists expect further modest cost-of-living measures, offset by increases to some of the smaller taxes.
“The government enters the Autumn Budget with a significantly weaker fiscal position than in March,” UBS Investment Bank economist Anna Titareva said.
“We expect the Chancellor to target fiscal buffer of (around) £15 billion rather than restore the March level, but even this would imply difficult trade-offs,” Titareva added.
Such a level of headroom would be thin by historic standards, equivalent to just 0.5% of economic output.
The Institute for Fiscal Studies said on Monday that headroom could fall only modestly, to around £20 billion from £24 billion in March, if the OBR judges that higher inflation will lift earnings growth and income tax revenues enough to offset most of the extra debt interest and welfare costs.
Britain’s 10-year government bond yields are the highest in the Group of Seven, a gap analysts attribute mainly to interest rate and inflation expectations rather than renewed investor nerves over the budget.
A wider poll of the same economists on Thursday showed the Bank of England is likely to raise interest rates in November, although they were divided about the prospect of further rate hikes.
In local-currency total return terms, gilts have beaten most G7 peers over the past month and sit mid-table for the year to date, according to FTSE indexes.
Even so, Healey will need to tread carefully. The bond market turmoil that followed former Prime Minister Liz Truss’s September 2022 “mini-budget” remains a cautionary tale.
“Markets probably can tolerate modestly lower headroom in the short term, but we think the fiscal plan will lack credibility,” Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, said.
“Tiny headroom also leaves the forecast highly sensitive to rates: another 30 basis-point rise in gilt yields and Bank Rate would cut it by about £5 billion. That leaves asymmetric upside risk to gilt yields.”
($1 = 0.7543 pounds)
(Writing by Andy Bruce in Manchester, polling by Shaloo Shrivastava and Indradip Ghosh in Bengaluru; Editing by Andrew Heavens)
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