Rachel Reeves is working to expand the fiscal framework ahead of a significant tax-raising budget in November, aiming to provide a buffer against volatility in government bond markets. Last autumn, the Chancellor achieved her first fiscal rule of balancing taxes and day-to-day spending with a £10 billion surplus, replicating this success at the March spring statement. However, the narrow margin has made compliance with her fiscal rules precarious, particularly amid rising borrowing costs.
The Chancellor seeks to increase this “headroom” to mitigate ongoing concerns regarding the potential breach of fiscal rules in the upcoming Office for Budget Responsibility (OBR) forecast and the government’s response. A Treasury source indicated that achieving greater headroom could involve implementing tax increases and spending cuts.
Political challenges are evident, as Labour currently trails in the polls, and another budget aimed at raising funds could be unpopular with voters following last year’s tax-raising package of £40 billion per year. Experts like Ruth Curtice from the Resolution Foundation suggest that increasing the margin for error against fiscal rules may yield substantial benefits. Nevertheless, achieving this could necessitate difficult decisions in a challenging budget environment.
The OBR’s recent downgrade in productivity forecasts is expected to negatively impact Reeves’s financial plan by £10 billion to £20 billion annually. Additionally, reversing cuts to the winter fuel allowance and other welfare changes will require further financial adjustments.
Reeves has dismissed suggestions from her party to adjust main tax rates but is developing a layer of tax policies aimed at addressing distortions in the current system. Potential measures include taxing landlords on rental income, reforms to capital gains tax, and increased gambling taxes. The budget is anticipated to address longer-term fiscal pressures as well.
The Treasury aims for decisive action to enhance investor confidence, given that government interest costs have escalated to £110 billion annually. Yields on 10-year government bonds have increased since Labour’s ascent to power, reflecting both global instability and domestic financial conditions. Analysts contend that the volatile fiscal landscape necessitates a larger fiscal headroom, as continued small adjustments in policy may not suffice.
Source: https://www.theguardian.com/uk-news/2025/oct/11/rachel-reeves-looks-for-extra-headroom-in-budget-to-insulate-uk-economy-against-bond-market