Chancellor Rachel Reeves has been warned by official forecasters that she is on course to break her own ‘fiddled’ Budget rules – paving the way for spending cuts or more tax rises.
The Office for Budget Responsibility (OBR) has downgraded its UK growth outlook, meaning nearly £10billion in ‘headroom’ will be wiped out, it was reported yesterday.
In a fresh blow to the Chancellor’s flailing growth ambitions, official figures are expected to show today that the UK is on the brink of recession.
The OBR has handed preliminary forecasts to Ms Reeves ahead of its update on the economy on March 26.
Sources told Bloomberg News that they would show the Chancellor breaking the ‘stability rule’ she introduced in October.
Under the rule, day-to-day Government spending must be brought into balance with tax receipts within three years.
At the time of the Budget in October, OBR projections showed Ms Reeves had £9.9billion in so-called ‘headroom’ – money the Government can use to spend more or cut taxes without breaking its fiscal rules.
But the growth outlook has worsened sharply while the cost for the Government to borrow money on financial markets has risen, leaving the Chancellor with a small deficit.
In a fresh blow to the Chancellor’s flailing growth ambitions, official figures are expected to show today that the UK is on the brink of recession today
Gross domestic product figures published today by the Office for National Statistics are expected to show the economy shrank by 0.1 per cent in the fourth quarter (pictured: City of London)
That is likely to mean Ms Reeves has to cut spending or put up taxes again in order to balance the books.
Tory business spokesman Andrew Griffith said: ‘It takes particular ineptitude to fiddle your own fiscal rules, having pledged not to, and then miss even these looser ones. Who pays the price? Small businesses, any entrepreneurs still left in the UK – and everyone’s children and grandchildren.’
The OBR said it would not comment on the preliminary assessment, but The Treasury was last night set to launch a leak inquiry.
Yesterday, the National Institute of Economic and Social Research predicted that Ms Reeves would be left with no fiscal headroom.
Gross domestic product figures published today by the Office for National Statistics are expected to show the economy shrank by 0.1 per cent in the fourth quarter. Two quarters of shrinkage in a row would mean the UK was in recession.
Labour came into office last July pledging to focus on growth, but the economy has stagnated.
Ms Reeves’s £40billion tax-raising Budget saw confidence crumble further. It included a £25billion raid on employer national insurance that firms warn will hit jobs and investment and raise prices.
Last week, the Bank of England cut its growth outlook for this year from 1.5 per cent to 0.75 per cent – and predicted inflation of nearly 4 per cent.
That raised fears of so-called ‘stagflation’ – the disastrous combination of stagnant growth with spiralling prices that took hold in the 1970s.
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In a speech today, Rupert Soames, chairman of the Confederation of British Industry, will call for decisive action from the Government to boost growth. He will say the Chancellor’s NI hike had hit ‘the confidence and trust of business’.
Yesterday, Bank of England rate-setter Megan Greene said economic developments over recent months had been ‘uncomfortable’, and the consultancy Capital Economics downgraded its growth outlook from 1.3 per cent to 0.5 per cent.
Shadow Chancellor Mel Stride said Ms Reeves ‘needs to make urgent course corrections before the damage she is doing… becomes permanent’.
The Prime Minister’s spokesman said: ‘The Government remains relentlessly focused on growth as the only way of sustainably raising living standards and delivering investment in our public services.’
