Reeves is eyeing bigger tax rises and spending cuts to build the UK’s fiscal buffer

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Chancellor Rachel Reeves is planning bigger tax rises and deeper spending cuts in next month’s budget in order to create billions of pounds of extra fiscal “leeway” for the Treasury against future economic shocks.

She believes that making painful decisions this fall may prevent her from coming back with more tax increases later in this parliament, according to her allies.

But the decision could mean political pain for Reeves, given she promised that last year’s budget – which raised £40bn in taxes – was a one-off.

In the October Budget and spring statement in March, the Chancellor left herself a margin of just £9.9bn against the key borrowing rule, which requires her to achieve a surplus in the current budget – which excludes investment – by 2029-30.

Pimco and BlackRock, two of the world’s largest bond investors, urged Reeves to build an investment fund. Greater buffer in public finance in the United Kingdom.

“If you have to drive from here to somewhere 50 miles away, you don’t have 50 miles worth of gas,” said Andrew Bowles, chief investment officer at Pimco Global Fixed Income.

One industry figure said senior Treasury insiders were considering going as far as doubling or tripling the previous reserve.

“The idea is to get rid of the tough decisions now and not have to come back every year with more tax increases,” they said.

One Treasury official stressed that “we are looking to increase reserves,” although he said he did not entertain the idea of ​​doubling or tripling them.

Having such a thin margin left the government at risk of violating its fiscal rules, which could cause government bond yields to rise — making it more expensive for the country to borrow more money.

Michael Saunders, a senior adviser at Oxford Economics, told the Financial Times that greater freedom could push government bond yields lower by increasing the credibility of the government’s fiscal plans.

Analysts are widely expecting Reeves to announce big tax rises in the Budget as productivity cuts from the Office for Budget Responsibility open a new hole in the public finances.

The Treasury has now received its first special forecasts from the Office for Budget Responsibility and is discussing the shape and size of the tax increases.

Officials are also looking for public sector savings as they try to cut borrowing, according to people familiar with the process.

Analysts widely expect Reeves to face a financial gap of between £20bn and £30bn due to… Reduced OBR throughput.

Yields on 10-year British government bonds have risen from 4.2 percent to 4.7 percent since Labor won the 2024 general election.

However, officials insist this is not unique to the UK, and government bond yields have drifted higher in other Western countries over the past 15 months.