United Kingdom: How much room does the Budget have amid limited fiscal flexibility? - Nomura

Fiscal flexibility is set to narrow in the UK, with Nomura’s budget preview forecasting that Chancellor Healey will let fiscal headroom decline to around £15bn at his first budget on 28 October. The cash deficit has ceased to deliver upside surprises following September’s public finance figures. For 2026-27, Nomura forecasts that the financing requirement will exceed plans by £4bn, with additional gilt and T-bill issuance covering equal shares of the shortfall.

How much fiscal flexibility remains amid headwinds?

"At his first budget (12.30pm Wednesday 28 October) Chancellor Healey is likely to allow a fall in fiscal headroom to around £15bn. Following today’s September public finance data the cash deficit is no longer surprising to the upside. Still, we think a combination of a lower run-rate of NS&I inflows and the need for cost-of-living support over the winter will mean a £4bn overshoot of the financing requirement for 2026-27."

"We assume this will be met equally between more gilt (£2bn) and T-bill (£2bn) issuance relative to existing plans (which were for £246.2bn and £5bn, respectively)."

"The Chancellor has limited his wiggle room to fill the fiscal gap, having ruled out various tax rises (no income tax, VAT or national insurance tax rate rises as outlined in the 2024 Labour manifesto, with capital gains tax now added to that list). Behavioural effects may result from raising tax rates more on a lower tax base (vs. raising tax rates less on a wider base) to bring in the same revenue."

"Elsewhere, the focal point could be any decision by the Treasury to use the potential firepower of the public financial institutions to boost investment, though that will require private sector take-up, as well as government willingness to expand its programmes."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)