By Andy Bruce and Sachin Ravikumar
LONDON (Reuters) -Britain’s finance minister Rachel Reeves will only meet her new fiscal rules by a slim margin according to the budget plans she announced on Wednesday, prompting a government bond selloff.
The Office for Budget Responsibility said Reeves had left herself “headroom” of just 9.9 billion pounds ($12.9 billion)against her commitment to balance the current budget, or the difference between revenues and day-to-day non-investment spending by the 2029-30 tax year.
Headroom refers to how much money the government can use to spend more or cut taxes without breaking its fiscal rules.
Reeves had described headroom of 15.7 billion pounds in her budget speech, but this referred to the buffer built into budget plans before running afoul of her second new fiscal “investment rule” – designed to reduce debt in future years.
Ahead of the budget, Reeves said she would leave headroom in reserve to keep financial markets onside.
Reeves’ predecessor, Jeremy Hunt, was criticised by fiscal experts for having just 8.9 billion pounds of headroom in March against his more restrictive version of Reeves’ investment rule.
The gilt market initially took the budget plans well, but yields soared after the OBR published its full economic and fiscal outlook at 1400 GMT.
At 1615 GMT, the 10-year yield was 3 basis points higher on the day, wiping out a fall of 10 basis points earlier in the day – a hefty 13 basis-point swing.
While a far cry from the wild gilt market moves sparked by former prime minister Liz Truss’ “minibudget” of September 2022, it marked a swift reassessment by investors of Reeves’ budget plans.
The OBR also bumped up its forecast for Bank of England interest rates in light of the budget plans, which showed markedly higher spending and investment – something else that may have swayed the gilt market.
Overall, the OBR forecasts government spending in five years time will be 70 billion pounds a year higher than it is now – with only just over half the cost covered by higher taxes and the rest through increased borrowing.
Shamil Gohil, fixed income portfolio manager at Fidelity International, said markets appeared concerned despite Reeves seeming to have struck a reasonable balance between taxation, spending and borrowing.
“There are question marks around the fiscal headroom, which looks quite tight, both on the net financial debt rule and current budget surplus, even after easing the rules – overspend is certainly higher than the market expected,” he added.
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