Borrowing overshoot shows current ‘fiscal headroom’ is not enough – London Business News | London Wallet

The latest bad news on the public finances will increase the pressure on the Chancellor to raise the ‘fiscal headroom’ in next week’s Budget.

This should provide a bigger buffer against future shocks. Unfortunately, it is likely to mean that the tax increases are bigger too.

The public sector borrowed £116.8 billion in the seven months to October, £9.9 billion more than the OBR’s March forecast.

Even more worryingly, the overshoot on the current budget deficit (borrowing to cover day-to-day spending) was £15.1 billion. This is crucial, because the government’s deficit rule requires this measure to be in surplus by 2029-30.

There are lots of moving parts, but the story all year has been higher-than-expected spending (including on public sector pay, welfare benefits, and debt interest), and lower-than-expected tax receipts (despite the apparently strong economic growth in the first half of the year).

Every Chancellor has aimed to hit their deficit targets with something to spare – known as the ‘fiscal headroom’. But the current budget is now forecast to be in surplus by just £9.9 billion in 2029-30, which leaves only a tiny margin for error.

A doubling of this headroom to £20 billion would make it less likely that Rachel Reeves will have to come back with another round of tax increases any time soon. However, larger tax increases now could also risk an even bigger hit to the economy.

The Chancellor may compromise for a smaller increase – perhaps to £15 billion. This would be better than nothing, but still only a small step in the right direction.