Rachel Reeves’s budget is expected to announce tax increases worth £26bn to more than double her fiscal headroom, according to figures published before her speech to the Commons.
In a highly unusual development triggering an immediate reaction in the financial markets, the figures from the Office for Budget Responsibility (OBR) published on its website before the chancellor’s speech, showed her measures would leave £22bn of headroom in five years’ time.
The OBR apologised and said it had launched an investigation after its economic and fiscal outlook document was published early before the budget, describing it as a “technical error”. Usually, the OBR publishes its outlook after the chancellor’s speech has finished.
The details include a longer-than anticipated three-year freeze on personal tax thresholds as the heaviest revenue-raiser in her budget.
Alongside a sweeping package of other smaller measures, the overall £26bn tax increase more than offsets additional spending of £11.3bn scheduled to be unveiled by Reeves, including the widely trailed lifting of the two-child limit on benefits.
In the spring, Reeves left £9.9bn in reserve as a buffer against her fiscal rules, which requires day-to-day spending to be matched by receipts in five years’ time. However, this was erased by higher borrowing costs, welfare U-turns and an anticipated sharp OBR productivity downgrade.
The chancellor is expected to use her critical speech in the Commons, with the government under intense pressure, to announce plans to slash living costs while also plugging the hole in the public finances.
The surprise early release from the OBR initially sent government bond yields down, as investors were cheered by the apparent increase in headroom. However, borrowing costs later rose. It is understood the release of the document was accidental.
The details show the Treasury watchdog’s downgraded forecasts had left Reeves with a shortfall of £6bn against her primary rule, with the bulk of this fuelled by dramatically reduced productivity forecasts. It also slashed its growth expectations for 2026 to 1.4% from the 1.9% expected in March.
However, Reeves’s tax measures more than offset the downgrades. Taking forecast and policy changes together, government borrowing is set to fall from 4.5% of GDP in 2025-26 to 1.9% in 2030-31.
The document confirmed that the chancellor would announce a council tax surcharge on properties worth more than £2m, which is expected to raise £400m in 2029-30. She will also cap a national insurance exemption for salary-sacrificed pension contributions at £2,000.
