Rachel Reeves is on course for a spring nightmare (Image: Getty)
Rachel Reeves has received a major blow after the UK’s economic watchdog delivered its first verdict on the state of the country’s finances ahead of the Spring spending review.
The Office for Budget Responsibility (OBR) has found that Ms Reeves is on course for a Budget deficit thanks to her decisions, something that would break a key promise by the Chancellor.
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Ms Reeves has pledged that day-to-day spending must be paid out of taxes and can’t come from borrowing.
Therefore the OBR forecast, revealed by Bloomberg, means Britain is on course for either higher taxes or spending cuts - something that could prompt a major rebellion by Labour MPs.
The deficit has been born of a combination of cuts in forecasted growth, confirmed by the Bank of England last week, and the rising price of government borrowing - gilts.
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READ MORE: Rachel Reeves dealt blow as UK businesses warn of 'critical risk’ and no growth
The OBR could deal a major blow to Ms Reeves' plans (Image: Getty)
Ms Reeves’ first Budget left her with ￡9.9 billion of so-called ‘headroom’, meaning she had a ￡10 billion buffer in case the cost of borrowing increased or GDP growth fell.
However the turbulent market moves earlier in the year has wiped this out, if the OBR’s reported forecast is correct.
In January the Institute for Fiscal Studies warned that the Chancellor’s ‘stability rule’ - that day-to-day spending must be met from taxes - was on course to be wiped out.
On January 8 a Treasury spokesperson issued a very rare statement reaffirming the Government’s commitment to the stability rule, describing it as “non-negotiable”.
A Treasury source also said the Chancellor had been clear she would not repeat the massive tax rises of her October Budget, largely confirming that if the OBR found Britain on course for a deficit it will be met with spending cuts.
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Andrew Bailey has already halved Britain's growth expectations (Image: Getty)
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Bloomberg reports the OBR saying that for every 1% downgrade to projected GDP at the end of this parliament, Ms Reeves will need to find ￡20 billion in savings to continue meeting her borrowing rules.
Last week the Bank of England cut their 2025 growth forecast from 1.5% to just 0.75%, warning that business and consumer confidence are on the slide.
Governor Andrew Bailey warned: “We now expect GDP growth to be notably weaker in the near term before picking up from the middle of the year”.
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Rachel Reeves will conduct her first Spring Statement on March 26.
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Rachel Reeves humiliated as global finance experts say she ruined economy
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While she previously suggested she wants to avoid making major tax changes in the spending reviews, it’s widely believed the volatile economic situation will force her hand this spring.
She told the CBI conference in November there would be no more taxes, however this was quickly walked back on by the Prime Minister.
Farmers in particular will be hoping Ms Reeves uses the March 26 event to water down her planned inheritance tax rise.