OBR error cut £18bn of headroom from Rachel Reeves’ Budget

An Office for Budget Responsibility (OBR) error has left chancellor Rachel Reeves with £18bn less headroom in her spending plans, potentially fuelling investor concerns about her first budget.

A footnote in the watchdog’s outlook, published on Wednesday alongside the Budget, said its earlier forecasts contained an error in the projections for public sector net financial liabilities - the debt measure now used by the chancellor in one of her new fiscal rules.

In March, the OBR found the margin in the 2028-29 fiscal year would be £62bn. It has since corrected the figure £43.9bn.

The margin, also known as the “headroom”, is the money left over in the budget to spend without breaking fiscal rules.

The OBR document said: “An error was identified in the net liabilities calculation used in the March 2024 forecast of PSNFL.

“The restated March PSNFL forecast and headroom calculation correct this error but otherwise is unchanged.”

The yield – or interest rate – on a 10-year gilt, an indicator for the cost of state borrowing, hit 4.6 per cent on Thursday afternoon, the highest point since August 2023, while the pound also weakened against the dollar.

Analysts said the market response can partly be explained by pre-Budget investor expectations that Ms Reeves would leave herself more headroom on her key debt rule.

Ms Reeves is forecast to have a margin of £15.7bn come the end of 2029-30, after accounting for her budget measures that included proposals for £142bn worth of extra borrowing.

Dan Hanson, chief UK economist at BloombergEconomics, said: “The expectation in markets prior to the budget was that even if Reeves did borrow to invest, the changes to the debt metric would mean she would still be left with a healthy amount of headroom against her fiscal target.

“In the event, the headroom was wafer thin – that partly reflected Reeves borrowing more than expected but it was also a lot to do with the OBR overstating how much space there was in the first place.”

On Friday, Treasury minister Darren Jones denied that Labour’s first budget bore any similarity to that of Liz Truss, saying the UK has “got PTSD” from the former prime minister’s catastrophic mini budget.

Asked about market jitters, he told Sky News that “markets always respond to budgets in the normal way”.

“There’s a lot of new information about the economy and the nation’s finances presented to Parliament, and it’s normal for markets to respond,” he said.

Mr Jones later added: “I think we’ve all got PTSD from Liz Truss and just let’s compare the two different scenarios, because they’re very, very different: So, under Liz Truss, as we saw, they sacked permanent secretary, they ignored the independent Office for Budget Responsibility.

“They announced £45 billion of unfunded tax cuts and said they were only just getting started. And then the market went mad and we all know what happened. Completely different in contrast to now.”