Chancellor faces difficult choices as financial buffer shrinks

Chancellor John Healey is facing pressure to raise taxes, reduce spending or revise government plans after estimates suggested his financial buffer has narrowed sharply.

The government’s headroom against its fiscal rules has reportedly fallen from £23.6 billion in March to about £7 billion. Higher government borrowing costs, renewed tension in the Middle East and commitments made by Prime Minister Andy Burnham have all contributed to the squeeze.

Measures including lower VAT on electricity, a national bus fare cap and business-rate support could add billions to spending if made permanent without savings elsewhere. Rising gilt yields also increase the amount the Treasury must pay to service public debt.

Healey has promised to keep the existing fiscal rules, which are intended to show investors that borrowing will remain under control. Economists say the next Budget may therefore require difficult trade-offs.

The figures are forecasts rather than money already lost, and conditions can change. Still, they illustrate how quickly global events and borrowing costs can restrict a government’s domestic ambitions.

Original reporting: Financial Times ↗