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Chancellor John Healey’s cautious budget, to be presented on October 28,
is expected to leave him with a headroom of £15.7 billion against his primary fiscal rule—down from the £23.6 billion projected at the time of the Spring Statement—as the energy price shock erodes his buffers, according to a report by Deutsche Bank.
The brokerage notes that a key question for the markets is whether the restrained nature of the budget might undermine investor confidence ahead of more significant decisions regarding spending, taxation, and borrowing due next year.
Deutsche Bank estimates that, excluding any new measures, the headroom against the primary fiscal rule has shrunk to £10.4 billion. Modest tax increases and measures to improve spending efficiency are expected to boost this figure to £15.7 billion. Meanwhile, the headroom against the debt rule is projected to fall from £27 billion to £18.3 billion.
Public sector net borrowing for the current fiscal year is expected to be revised upward to £126 billion (3.9% of GDP)—£12 billion higher than the Spring Statement forecasts—with much of the increase attributed to temporary, one-off policy measures.
Nevertheless, this figure is expected to decline to 3.4% of GDP (£115 billion) next year, and further to £61 billion (1.6% of GDP) by the end of the forecast period.
The government’s issuance plan for sovereign bonds (gilts) for the current fiscal year is expected to increase by £5.5 billion, reaching £251.8 billion, with a portion of the funding gap to be covered through the issuance of Treasury bills. Between the 2027/28 and 2030/31 financial years, the volume of government borrowing is expected to be, on average, £12.3 billion per year higher than previously forecast.
Expectations for the Bank of England’s base interest rate are nearly 1 percentage point higher than the spring projections from the Office for Budget Responsibility (OBR); according to Deutsche Bank estimates, this will add nearly £10 billion to borrowing by the end of the forecast period.
Tax increases and austerity measures are expected to contribute a net total of £4.3 billion by the end of the forecast period, primarily driven by a tax on banks.
More significant decisions are set to follow next year, the report states. Analysts estimate that the Spending Review will result in a £15 billion increase in expenditure, with an additional £8 billion required to raise defense spending from 2.7% to 3% of GDP, and approximately £18 billion needed to establish a national social care service—collectively amounting to over £40 billion in the medium term. The report notes that the risk of an early election "should not be ruled out."