UK Chancellor John Healey may accept smaller fiscal buffer to cut tax hikes

Key facts

• Chancellor John Healey is considering a smaller fiscal buffer for the Autumn Budget.
• KPMG projects the UK's fiscal headroom will fall to about £12 billion by autumn.
• This is a decrease from the £23.6 billion available in the spring forecast.
• Surging borrowing costs and underwhelming economic growth are contributing factors.
• KPMG forecasts the Bank of England will raise interest rates to 4% in November.

UK Chancellor John Healey is reportedly weighing a reduction in the government's fiscal buffer to lessen the impact of tax hikes in the upcoming Autumn Budget. A fresh analysis by KPMG indicates that the government's financial headroom has been significantly reduced, potentially to around £12 billion, a sharp decrease from the £23.6 billion available at the time of the spring forecast.

This erosion is attributed to a combination of factors, including increased borrowing costs driven by market reactions to the Iran conflict and growing expectations of an interest rate rise, as well as weaker-than-anticipated economic growth. KPMG anticipates that the Office for Budget Responsibility (OBR) may further downgrade its forecasts, potentially reducing the Chancellor's buffer by an additional £2 billion.

The consultancy suggests that restoring the previous level of headroom could necessitate tax increases or spending cuts. Given the government's commitment not to raise taxes on working individuals, Healey may need to explore alternative revenue-raising measures. Beyond the Budget, KPMG forecasts that the Bank of England will increase interest rates from 3.75% to 4% in November, with potential cuts resuming next summer as energy price impacts on inflation diminish.