As much as £14 billion of Rachel Reeves’s newly created £22 billion fiscal buffer could be wiped out by a series of government U-turns and a big decline in net migration.
The chancellor’s effort to appease financial markets by more than doubling her fiscal headroom at November’s budget may have been in vain because of the government easing tax rises on pubs and farmers along with much lower migration in the coming years, according to calculations by Bloomberg.
Fiscal headroom is the amount of tax revenue generated by the government above the amount of money that it spends, known as a fiscal surplus. Under her fiscal rules, Reeves must retain this surplus revenue in the 2029-30 financial year.
In the November budget, the chancellor raised taxes by £26 billion, including an £8 billion multi-year extension to the freeze on income thresholds, more than doubling her safety net from £9.9 billion. However, in less than two months, several government U-turns have put pressure on this margin.
After more than 1,000 pubs across the country banned Labour MPs, the government is to cushion the rise of business rates on the sector at a cost of about £300 million. Reeves and Sir Keir Starmer have also raised the threshold at which farmland is caught by inheritance tax, costing the Treasury a further £130 million.
Net migration to the UK could undershoot forecasts published by the Office for Budget Responsibility by 100,000 a year, lowering tax revenues by about £9 billion in 2029-30, Bloomberg reported. This reduced tax revenue is because economically active migrants are a net benefit to the economy.
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The prime minister is also at risk of missing his pledge to raise military spending to 2.5 per cent of gross domestic product by 2027 and then 3 per cent in the next parliament. It was revealed by The Times that the funding shortfall to hit that target amounts to £28 billion over the next four years, or about £7 billion per year.
Financial markets commended the chancellor for widening the fiscal headroom less than two months ago. UK bond yields have fallen quicker than yields on comparable countries’ debt in recent months.