Chancellor John Healey’s financial wriggle room has been slashed by almost half ahead of his first Budget, a fresh KPMG analysis has warned.
The consultancy’s latest economic outlook projects that the Government’s fiscal headroom will shrink to roughly £12billion by the autumn, a sharp drop from the £23.6billion available when the spring forecast was published.
The findings heap significant pressure on Mr Healey to either increase taxes or reduce public expenditure when he delivers his Budget on October 28.
A combination of surging borrowing costs triggered by the Iran conflict and underwhelming economic growth is behind the deterioration.
The Chancellor faces ‘reduced’ fiscal headroom
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PA
The £9billion erosion stems from higher debt servicing costs following a sell-off in gilts, itself fuelled by inflation fears linked to the Middle East conflict and growing market expectations of an interest rate rise before the year is out.
Weaker-than-anticipated growth accounts for much of the remainder. KPMG expects the Office for Budget Responsibility (OBR) to downgrade its forecasts, stripping a further £2billion or so from the Chancellor’s buffer.
Long-term borrowing costs have climbed sharply as investors demand higher returns on UK Government debt, leaving Mr Healey with what KPMG described as “limited room for manoeuvre” at his inaugural Budget.
In its report, the Big Four firm stated: “The Chancellor will have limited scope to provide significant support for growth or the cost of living when the Budget is delivered next month, as higher borrowing costs and weaker growth have reduced the Government’s fiscal headroom.”
Cumulative extra cost of national debt per year | FACTS4EU
KPMG’s report is damming for the UK Government
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GETTYThe consultancy added: “Restoring the previous level of headroom could require tax rises or spending reductions.”
Given the Government’s pledge not to raise taxes on working people, KPMG suggested Mr Healey may be forced to explore alternative revenue-raising measures.
The firm said: “With the Government committed to not increasing taxes on working people, the Chancellor may need to consider other tax measures.”
Beyond the Budget, KPMG forecasts that the Bank of England will raise interest rates from 3.75 per cent to four per cent in November.
However, analysts predict base rate cuts will resume next summer once the effect of elevated energy prices on inflation begins to dissipate.
Inflation, which climbed to 3.1 per cent in August, is projected to reach around 3.5 per cent this autumn and hit a peak of roughly four per cent during the first three months of 2027.
On growth, the consultancy anticipates the UK economy will expand by 1.3 per cent across 2026, though momentum is expected to slow in the second half as rising prices squeeze household budgets.
Notably, gross domestic product (GDP) growth is expected to pick up modestly to 1.4 per cent in 2027.