The fiscal watchdog has cut its growth forecasts, according to reports, which would force Chancellor Rachel Reeves to hike taxes or cut spending next month.
The Office for Budget Responsibility’s (OBR) preliminary projections, given to the Treasury last week, suggest that sluggish growth and higher borrowing costs have wiped out the Chancellor’s headroom.
The watchdog will put together four more forecasts in the coming weeks, but the earliest draft suggests that Reeves will be facing a small deficit in March, Bloomberg reported.
Reeves left herself a buffer of just £9.9bn in October to stay on the right side of her key fiscal rule, which requires day-to-day spending to be funded by tax receipts.
But growth significantly undershot expectations in the second half of last year, which has a major knock-on impact on government tax receipts.
Measures of business and consumer confidence have nosedived in the face of higher taxes and gloomy government messaging.
New figures out tomorrow are expected to show that the economy contracted 0.1 per cent in the final quarter of last year, leaving the UK at risk of recession.
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Reflecting the poor performance of the economy, many analysts have slashed their forecasts in recent weeks.
Having projected growth of 1.5 per cent back in November, the Bank of England halved its forecasts to just 0.7 per cent last week.
The OBR was already much more optimistic than many forecasters, predicting in its most recent round of forecasts that the economy would grow 2.0 per cent in 2025.
Government borrowing costs are also higher than in October, despite the recent recovery in bond markets, which will add to the Treasury’s spending bill.
Reports suggest that Reeves is likely to opt for spending cuts to balance the books in March, but further tax rises might be on the cards in the autumn.
“As previously announced, the OBR’s next forecast will be presented to Parliament on 26 March alongside a statement from the Chancellor. We do not comment on speculation around OBR forecasts,” a Treasury spokesperson said.