Rachel Reeves faces significant pressure to implement substantial spending cuts in her upcoming Spring Statement, scheduled for later this month, in order to counteract the rising costs associated with government borrowing, investors have cautioned. This predicament arises as bond yields have increased recently, complicating the fiscal landscape for the UK Chancellor.
The Office for Budget Responsibility (OBR) revealed on Wednesday that its preliminary fiscal forecasts relied on data reflecting the UK’s borrowing costs over a 10-working-day period ending on February 12. This timeframe does not take into account the subsequent uptick in gilt yields, which has further strained public finances.
Recent analysis from Capital Economics indicates that Reeves could fall short of meeting her crucial fiscal target by approximately £1.6 billion. This setback is attributed in part to the rising borrowing costs that fell within the OBR’s assessment window. Notably, if the evaluation were based on a more recent period reflecting the current interest rate environment, the shortfall could be nearly £1 billion larger.
Investors stress that these numbers highlight the urgent need for Reeves to bolster public finances during her March 26 announcement. To instill confidence in the markets, she may need to exceed the minimum expenditure adjustments suggested by the OBR’s forecasts, ensuring that she is actively managing the deficit and maintaining fiscal discipline amidst growing economic challenges.
