Rachel Reeves's 22bn fiscal buffer under threat from U-turns and lower migration

"Rachel Reeves's carefully constructed £22 billion fiscal buffer could be eroded by as much as £14 billion as a result of policy U-turns and a sharper-than-expected fall in net migration, raising fresh questions about the durability of the chancellor's budget strategy. Markets initially welcomed Reeves's November budget, which more than doubled the government's fiscal headroom and was seen as a signal of discipline after months of concern over the public finances. However, less than two months later, analysts warn that the margin for error is already narrowing."

"According to calculations by Bloomberg, a combination of softened tax measures and weaker migration-driven revenues could reduce the buffer to as little as £8 billion by the end of the forecast period. Fiscal headroom refers to the surplus between government revenues and spending in the target year, in this case 2029-30, which Reeves must preserve under her fiscal rules. In November, the chancellor raised taxes by £26 billion, including an £8 billion multi-year extension of the freeze on income tax thresholds, lifting headroom from £9.9 billion to £22 billion."

"Since then, a series of reversals has begun to chip away at that margin. Following mounting pressure from the hospitality sector - including more than 1,000 pubs symbolically banning Labour MPs, the government moved to soften planned increases in business rates for pubs, a decision expected to cost around £300 million. Ministers have also eased proposed changes to inheritance tax on farmland, increasing the threshold at which agricultural assets are caught by the levy."

The government increased fiscal headroom to £22 billion after November tax rises of £26 billion, including an £8 billion extension of the income tax threshold freeze. Bloomberg calculations show that softened tax measures and weaker migration-driven revenues could cut the buffer to as little as £8 billion by the end of the forecast period. A series of policy reversals has begun to erode the margin, including a move to soften business rate increases for pubs (around £300 million) and easing inheritance tax changes on farmland (around £130 million). Revised projections suggest net migration could undershoot forecasts by as much as 100,000 people a year, creating the largest risk to public finances.

Read at Business Matters