(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves was left with £18 billion ($23 billion) less headroom in her spending plans after the UK’s fiscal watchdog made an error, potentially fueling investor concerns about her first budget.
A footnote in the Office for Budget Responsibility’s outlook on Wednesday said that its March forecasts contained an error in the projections for public sector net financial liabilities, the debt measure now used by Labour’s Reeves in one of her new fiscal rules. The OBR at the time found the margin in the 2028-29 fiscal year would be £62 billion — a figure it’s since corrected to £43.9 billion.
That shows the chancellor’s buffer against the measure back in March was actually £18 billion smaller than originally stated, meaning markets may have assumed Reeves started with more money for her budget this week. The OBR declined to comment.
“The error reduces the confidence of gilt investors and credit rating agencies to a degree if a wrong calculation could be of this significance,” Dennis Shen, a senior director at Scope Ratings, said. The mistake illustrates “growing pains as the UK adjusts to the new debt measure.”
Analysts have said this week’s rout in UK bonds can partly be explained by investor expectations in the run-up to the budget that Reeves would leave herself more headroom on her key debt rule. She gave herself a buffer of just £15.7 billion after accounting for her budget measures that included plans for £142 billion of extra borrowing over five years.
Her headroom had increased to £49 billion by this week’s forecasts — before accounting for the contents of the budget — but remained substantially lower than the original March estimate. The error is briefly mentioned in a footnote deep in Wednesday’s budget forecast documents.
“The expectation in markets prior to the budget was that even if Reeves did borrow to invest, the changes to the debt metric would mean she would still be left with a healthy amount of headroom against her fiscal target,” said Dan Hanson, chief UK economist at Bloomberg Economics.
“In the event, the headroom was wafer thin – that partly reflected Reeves borrowing more than expected but it was also a lot to do with the OBR overstating how much space there was in the first place,” he said.
Reeves this week changed the measure in the UK’s debt rule to PSNFL, which captures some assets, like student loans and investments made through policy banks, to give her more room to borrow in order to ramp up public investment. PSNFL is required to be falling as a share of GDP in the 2029-30 fiscal year. In March, when a different debt measure was tracked, the target date was 2028-29.
“An error was identified in the net liabilities calculation used in the March 2024 forecast of PSNFL”, the OBR documents said. “The restated March PSNFL forecast and headroom calculation correct this error but otherwise is unchanged.”
Reeves’ first budget triggered a market backlash, causing UK bond yields to surge amid concerns over extra borrowing. It has led investors to expect a slower pace of interest rate cuts from the Bank of England. Reeves herself sought to reassure markets in a Bloomberg TV interview on Wednesday, saying that the “No. 1 commitment” of the Labour government is “economic and fiscal stability.”
--With assistance from Andrew Atkinson and Greg Ritchie.
(Updates with quote from Scope Ratings in fourth paragraph.)
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