In a panel discussion last week, an official from the United Kingdom’s Office for Budget Responsibility (OBR) addressed those worries head-on. This is against the backdrop of the Government preparing for their new Budget. This fiscal headroom peaked at just under £80 billion in 2014. Despite its sharp decline over the years, and as of 1 March 2025, this now languishes at just £9.9 billion.
During a rare pre-Budget speech held at Downing Street, Shadow Chancellor Rachel Reeves emphasized the challenges faced by the UK economy. She continued to note that productivity was not meeting the standard. This decrease in activity has a direct, negative effect on public finances as it means that tax receipts are lower. Whether this is an isolated case or could represent a broader trend where chancellors have been leaving increasing fiscal room to fudge is up for debate.
The OBR’s latest analysis showed that the fiscal headroom hasn’t moved since Reeves’ first Autumn budget speech. The £9.9 billion figure should therefore be considered in the context of how low this is by historical standards. Prior to November 2022, chancellors tended to maintain a buffer of £20 billion – £30 billion.
Reeves’ last Shadow Budget provided a definitive safety net of £9.9 billion. Compared with the current real numbers, that paints a deeply concerning picture of going backwards. The OBR’s latest forecast shows that this buffer is set to disappear altogether. It would result in a massive deficit of minus £3 billion. This is a real reduction as the forecast doesn’t include the impact of recent government U-turns on welfare and winter fuel payments.
This idea of headroom has become an important financial protection for the Chancellor. Second, it provides a dependable safety net in times of extended economic disruption. Chancellors are riding on margins more razor thin than any time in history. This is particularly problematic, leaving them with less flexibility to respond to a sudden, unexpected economic downturn.
State government continues to face a complex fiscal environment. Prof David Miles, from the OBR stressed, “I don’t think it was in any way misleading for the chancellor to say that the fiscal position was extremely difficult at the start of that week”. He further elaborated, “I don’t think that that was in itself inconsistent with the final pre-measures assessment we’d made, which, although it showed a very small positive amount of so-called headroom, it was wafer thin.”
The Tax Day Tory Chancellor has delivered a record £26 billion in tax rises. Of this, we expect £8 billion to be from plans to extend the freeze on income tax and National Insurance thresholds by another three years. This marks an important step towards transparency, as the government acknowledges the shrinking fiscal space for additional public spending or tax cuts.
The OBR’s economic forecasts have come under scrutiny following Richard Hughes’ resignation from his position. Hughes accepted “full responsibility” for several problems found in an investigation into failures that led to errors in the OBR’s forecasts. Even with these unfortunate realities, Prof. Miles said that the forecasts turned out to be better on balance than what a lot of people had expected.
As policymakers meet these growing fiscal challenges head on, they need to choose wisely among their limited options. The road ahead is going to involve hard decisions about how to be both fiscally prudent and responsive to the needs of the traveling public.