Two-thirds of the Chancellor’s ￡9.9bn borrowing buffer has been reportedly wiped out. (Image: Getty)
Rachel Reeves has little headroom left as her spending rules set out just two months ago are at risk of being broken. Her October Budget tax raid has led to a surge in borrowing costs which has reignited inflation fears.
A staggering two-thirds of the Chancellor’s ￡9.9 billion borrowing buffer has been wiped out due to higher borrowing, according to economists.
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Capital Economics have predicted that Ms Reeves' buffer has been sliced to just ￡3.5 billion, suggesting that diving any further into this figure could see her raise taxes or cut spending as soon as March.
The Chancellor allocated herself such a small budget in the hope that day-to-day spending would be brought back into balance within three years.
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Rachel Reeves Autumn Budget in Downing Street (Image: Getty)
However, market pricing now implies that interest rates will remain above 4% for the majority of this period.
The government has refused to rule out raising taxes in the Spring Budget in order to meet Ms Reeves’ harsh borrowing limit as they insist a balance is “non-negotiable”.
A shadow of doubt remains over the UK economy as inflation could rise to 3% next year, up from the current 2.6% forecast.
This could leave investors nervous about the country’s debt.
This comes as JP Morgan Asset Management said there is “big uncertainty” over the expanse of next year’s wage increases and the impact on prices.
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Economists predict inflation rising to 3% next year, up from the current 2.6%. (Image: Getty)
Seamus MacGorain, a managing director at the bank, told The Telegraph: “I think there’s a big uncertainty [about the UK]. We had a period of very high inflation, mainly due to energy prices. And that inflation passed through prices all around the economy, including service prices and wages.
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And now we’ve had a year where energy prices are a bit lower. What should happen is that next year, all these other prices, like services, wages, should come down. And if they do, then I think the UK is quite an attractive market, [but] there’s still a bit of uncertainty about whether that will happen.
“We think the valuation is there, but we’re not seeing enough progress on inflation yet.”