Once again, ahead of a Budget, all the talk is of headroom and how much of a buffer John Healey will have before bumping up against the government’s fiscal rules. In March, the Office for Budget Responsibility put the headroom – the margin that lets the government spend a little more, or have a weaker-than-expected economy without having to raise taxes or cut spending – at £23.6 billion. Since then, the government’s cost of borrowing has soared as investors have dumped government debt. That means the government’s interest costs will rise, and that extra interest cuts the Chancellor’s headroom. Reality Check calculates that changes in borrowing costs and interest rate expectations have reduced headroom by some £10 billion, were the OBR to produce its forecast on the last ten days’ worth of market expectations.
Bond yields are surging across the world thanks to persistently high oil prices and renewed fears that we’re in for yet another inflationary shock. When markets opened this week traders upped their bets on the chances of further interest rate rises over the next year. While this phenomenon is a global one, the UK is often the worst-hit nation thanks to our ‘moron premium’ which, as well as punishing us for our persistent refusal to fix the fundamental problems with our economy, also reflects the changing nature of those who buy our debt.
The government has almost £3 trillion of debt, so changes in the amount of interest on it, currently over £100 billion a year, can have a big effect on the chancellor’s headroom. When it forecast debt interest spending for Rachel Reeves’s spring statement in March, the OBR used market expectations for government borrowing costs and the Bank of England’s interest rate over the ten working days to 30 January. It also published a ‘ready reckoner’ saying what effect it expects a sustained one percentage point rise in gilt yields (the government’s borrowing cost) and short-term interest rates would have on debt interest.
The OBR hasn’t said publicly from what window it will take the readings for the upcoming Budget – we’ll only find out when the forecast itself is published on 28 October – though market insiders expect we could be in the middle of it. But we know how gilt yields and interest rate expectations have changed. Whenever the forecast window is, the elevated gilt yields and interest rate expectations will see Healey’s headroom squeezed. We’ll keep tracking the figures here and on The Spectator’s data hub.
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