Rachel Reeves may be forced to make fresh public spending cuts in her March “spring forecast” as soaring government borrowing costs threaten to derail her fiscal rules.
Analysts have warned that Britain’s long-term borrowing costs, now at their highest level since 1998, could wipe out nearly all of the £10bn buffer she had set aside in the autumn budget.
The yield on UK 30-year debt—a key indicator of borrowing costs—surged by 0.4 percentage points to 5.22%, surpassing levels seen during the market turmoil following Liz Truss’s 2022 mini-budget. This rise marks the highest point in 27 years and adds significant pressure to the government’s fiscal plans.
Rising borrowing costs are part of a global trend, as investors brace for stubbornly high inflation that could prevent central banks from cutting interest rates. Concerns are also mounting that US president-elect Donald Trump’s policies could fuel inflationary pressures further.
The UK economy, meanwhile, is struggling. Growth has stagnated, and inflation remains above the Bank of England’s 2% target, limiting options for reducing borrowing costs. Economists warn that the sustained rise in bond yields could lead the Office for Budget Responsibility (OBR) to conclude that Reeves is on track to breach her fiscal rule of balancing day-to-day spending with tax revenue by 2029-30.
“The recent rise in borrowing costs has wiped out £8.9bn of the chancellor’s £9.9bn headroom,” said Ruth Gregory, deputy chief UK economist at Capital Economics. “This leaves as little as £1bn remaining, and even a modest 0.06 percentage point increase in 20-year borrowing costs could eliminate it entirely.”
Such a scenario could force Reeves into a difficult position: breaking her fiscal rules or introducing more tax hikes and spending cuts at a time when the economy is already fragile. Gregory noted, “This means Reeves could soon face a nasty choice of breaking her fiscal rules or announcing more tax rises and/or spending restraint.”
Reeves is set to present updated OBR forecasts on 26 March, but she has indicated that tax and spending changes are unlikely, emphasising her commitment to one major fiscal event annually for the sake of stability. However, City analysts are sceptical about whether she can afford to forgo corrective measures if the OBR delivers a bleak assessment—raising speculation about potential tax increases.
Despite such concerns, Reeves has pledged not to raise taxes further after implementing £40bn in revenue-raising measures in her autumn budget. The Treasury echoed this stance, insisting that any adjustments would focus on spending cuts.
“We are not going to pre-empt the OBR’s forecast; however, no one should be under any doubt of the chancellor’s commitment to economic stability and sound public finances. That is why meeting the fiscal rules is non-negotiable,” said a Treasury spokesperson.
Reeves has ruled out repeating the upheaval of October’s budget, instead focusing on eliminating waste in public spending through a review and prioritising economic growth. The coming months will reveal whether she can walk this tightrope without losing balance.
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