Constrained options Is there any wiggle room for Reeves?

Rachel Reeves is rapidly running out of wiggle room amid higher borrowing costs, stubborn inflation, a sluggish economy and a promise to find room for billions more in spending on defence.

- Richard Partington

On Tuesday, the chancellor will get the final verdict from the Office for Budget Responsibility (OBR) before her 26 March spring statement on whether her fiscal rules have been smashed apart by spiralling financial pressures since last autumn's budget.

The OBR's final "pre-measures forecast" will be crucial because it will show the chancellor how much headroom, if any, is left within her self-imposed fiscal rules.

At the October budget, Reeves held back £9.9bn of headroom in reserve against her primary fiscal rule - requiring day-to-day spending to be matched by tax receipts in the fifth year of the forecast.

However, the government has been borrowing more than the OBR forecast, and Britain's debt servicing costs have risen sharply on financial markets.

Analysts at Capital Economics expect this could whittle down the chancellor's headroom from £9.9bn to £2.8bn. However, there are other factors that will influence the OBR's assessment.

Growth in the UK economy has been weaker than forecast in October, having narrowly avoided a recession in the second half of 2024. The OBR is widely expected to slash its 2% growth forecast for 2025 closer to 1%.

In addition, analysts say a weaker growth outlook could eradicate the chancellor's headroom.