Rachel Reeves has been given political cover to adjust the UK’s fiscal framework, amid growing warnings that the Chancellor may be forced to raise taxes or cut spending to stabilise the public finances.
While allies of Reeves insist her commitment to the current fiscal rules remains "non-negotiable", pressure is mounting after new analysis shows the UK’s shrinking room for manoeuvre.
In its latest review of the UK economy, the International Monetary Fund (IMF) said Reeves could "refine" the current framework to promote greater policy stability.
The move gives the Chancellor political cover to avoid making disruptive changes between Autumn Budgets.
One suggestion from the IMF is to reduce the number of official economic forecasts from two each year to just one, delivered alongside the Budget.
The idea is being discussed inside the Treasury, though Reeves’ team say her core promise, to balance day-to-day Government spending with revenue by 2029-30, remains "non-negotiable".
The IMF has warned the Government's financial breathing room is too small to absorb any economic shocks
PA / GETTYHowever, the IMF also issued a warning explaining that the Government's financial breathing room, or "headroom," is too small to absorb any economic shocks. If the economy weakens, the fund says Reeves may have no choice but to raise taxes or cut spending.
Luc Eyraud, IMF UK mission chief, said: "To reduce the reactivity of short-term policy, the first solution should be to have higher headroom . . . [But] we know it is very difficult, not just politically but from an economic perspective, because some of the spending is very important."
The Chancellor has already been forced to set out a £14 billion plan to fix public finances, announced in March’s Spring Statement.
But since then, borrowing costs have risen and Labour leader Sir Keir Starmer has added to future spending by reversing cuts to pensioner fuel subsidies and reviewing the two-child benefit cap.
The IMF said these pressures, along with changes to official forecasts, could quickly wipe out Reeves’ remaining £9.9 billion in headroom.
The IMF said these pressures, along with changes to official forecasts, could quickly wipe out Reeves’ remaining £9.9 billion in headroom
GB NEWSThe fund warned that if the current rules stay as they are, even small changes to economic data could trigger frequent and disruptive policy changes.
To reduce that risk, the IMF recommended a series of changes. These include cutting the number of official forecasts, softening how rule breaches are handled, and changing how the Office for Budget Responsibility (OBR) presents its figures, with less focus on narrow headroom targets.
The IMF slightly upgraded the UK’s growth forecast for next year to 1.2 per cent, but it still described medium-term growth as "subdued," mainly due to weak productivity.
The IMF said cutting the deficit was necessary "to stabilise net debt and reduce vulnerability to gilt market pressures"
GETTYIt also warned of risks from global trade tensions and market volatility.
Reeves said: "The UK was the fastest growing economy in the G7 for the first three months of this year and today the IMF has upgraded our growth forecast."
Even so, economists say she may be boxed in by her own rules and could be forced to raise taxes again in the Autumn Budget.
The IMF said cutting the deficit was necessary "to stabilise net debt and reduce vulnerability to gilt market pressures".
The next big test will be the Spending Review, due in two weeks, where Reeves is expected to outline how departments will be affected by tighter finances.
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