Rachel Reeves faces a looming £20bn deficit in public finances, driven by soaring interest rates and weakening economic growth, economists at JP Morgan warn.
Rising borrowing costs in financial markets have sparked fears that the Chancellor might need to convene an emergency Budget in March to outline measures—either tax increases or spending cuts—to cover higher interest payments.
Allan Monks, an economist at JP Morgan, cautions that the economy has reached a standstill, partly due to Ms Reeves’s National Insurance increase, which has significantly dented business confidence. This slowdown in growth is expected to result in lower tax revenues and increased borrowing requirements.
“Higher borrowing costs are merely the tip of the iceberg; weak growth is our main concern, especially given the tax hikes introduced in the last Budget,” he noted.
“All available fiscal headroom appears likely to vanish, potentially exposing a net shortfall of around £20bn, depending on the Office for Budget Responsibility’s assumptions, which the government will have to address come spring.”
In October, the Chancellor set new borrowing targets, pledging that within five years, borrowing would be limited to financing investments, while routine spending would be fully funded by tax revenues. The Office for Budget Responsibility had estimated that Reeves was on track to achieve this target, with about £9.9bn of buffer.
However, Mr Monks estimates that much of this buffer could be wiped out by higher debt interest costs if current market conditions prevail. Additionally, he believes that record tax increases totaling £40bn have hampered economic growth, throwing Ms Reeves’s fiscal plans off by an estimated £17bn to £35bn, subject to the extent of an anticipated OBR downgrade.
To plug the gap and restore fiscal headroom, Mr Monks suggests that approximately £20bn in spending cuts or tax hikes might be necessary.
“The Chancellor will likely want to avoid drastic tax increases and immediate spending cuts. The most appealing option may be to promise future spending cuts—albeit vaguely—and hope they don’t have to be implemented immediately,” he said. “This tactic might invite further skepticism due to its lack of credibility, but the goal would be to buy time until a comprehensive Budget is presented.”
