Andy Burnham is facing a growing £10bn gap in the UK’s public finances, with economists warning that tax rises or spending cuts may be “inevitable” as the government prepares for its first Budget under Chancellor John Healey.
The fiscal outlook is being assessed ahead of next month’s Budget by the Office for Budget Responsibility, the independent fiscal watchdog responsible for producing the economic and public finance forecasts that underpin government policy.
The OBR’s assessment will be closely watched by the Treasury because changes to the economic outlook can have a substantial effect on the government’s borrowing costs and debt-interest bill. Higher debt servicing costs would, in turn, reduce the room available to ministers for tax and spending decisions.
A senior Whitehall source described the timing of Healey’s inaugural Budget as “hugely challenging”, citing additional economic pressures arising from the war with Iran.
Financial experts have warned that the government could face difficult choices if its fiscal headroom continues to narrow. Healey’s available margin against his fiscal rules is reported to have fallen from about £23bn to only £5bn, leaving substantially less room to absorb weaker growth, higher borrowing costs or unexpected spending pressures.
That deterioration has intensified scrutiny of the government’s preparations for the October Budget and its ability to meet existing commitments while maintaining its fiscal rules.
The prospect of further tax increases or reductions in public spending is particularly significant because ministers have sought to reassure financial markets that the government remains committed to fiscal discipline.
In public statements, Healey has indicated that he intends to maintain a “buffer” within the government’s fiscal plans. However, the Chancellor has yet to provide detailed guidance on the size of that buffer or how it would be protected if the OBR’s forecasts deteriorate.
The government is therefore entering the Budget with a considerably narrower margin for error than previously expected.
For investors and economists, the OBR’s updated forecasts will provide an important test of the government’s fiscal strategy, particularly as borrowing costs remain sensitive to inflation, growth and geopolitical developments.
The combination of weaker fiscal headroom and heightened economic uncertainty could leave Healey facing pressure to identify additional savings or revenues before he sets out his plans next month.
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