The UK Treasury is reportedly considering a reduced fiscal buffer to limit tax hikes in the next month's Budget. Finance Minister John Healey may accept a smaller fiscal buffer, moving away from the previously forecast £23.6 billion, potentially down to around £14 billion, according to sources cited by the Financial Times. This decision is influenced by signals from investors indicating that such a move would not spook the gilt market.
This consideration follows a common pre-Budget pattern in the UK, where potential measures are floated through the press before formal submission. Historically, the credibility of the fiscal framework and the headroom number's impact on gilt pricing have been more significant than the overall size of the Budget package. The distinction often made by the rates market is between headroom trimmed for current spending (viewed as loosening) and headroom trimmed to avoid tax rises (which keeps the net fiscal impulse largely unchanged).
Chancellor Healey is reportedly seeking revenues to offset the impact of higher borrowing costs, particularly due to the Iran war. Options for raising tax are limited by Labour's manifesto. There are also concerns from global banks that increased taxes could lead to a shift of investment away from London. Previous reports have highlighted challenges such as a potential £4 billion headroom hit from lower immigration forecasts and a budget deficit of £1.8 billion in July.
The market's reaction to this news will be a key part of the feedback loop. Treasury officials have a history of testing market tolerance in advance and adjusting their approach if there's a negative response from the long end of the gilt market. Further confirmation from the Treasury, any counter-briefing, and the formal forecast timetable leading up to the Budget will provide additional repricing points.
