Chancellor on Track to Miss Fiscal Rules, Says Economic Forecaster

LONDON—The UK’s fiscal outlook remains perilously close to missing its self-imposed budget targets, according to the Office for Budget Responsibility (OBR), despite Chancellor Rachel Reeves’ recent assurances of adherence. While the OBR’s March 2025 report technically confirms the government will hit its goal of balancing the current budget by 2029-30, razor-thin margins and escalating risks suggest a fragile path ahead for investors.

A Delicate Balancing Act

The OBR projects a £9.9 billion surplus in the current budget by 2029-30—barely meeting the Chancellor’s mandate. This narrow headroom is underpinned by aggressive welfare reforms, spending shifts, and tax compliance initiatives. However, the probability of success is just 54%, with the supplementary target for falling public sector net financial liabilities (PSNFL) at an even riskier 51%.

The fragility becomes clearer when analyzing the risks:
- Productivity Weakness: A 0.3% annual productivity growth—far below the OBR’s 1.0% central forecast—would plunge the budget into a £14.0 billion deficit.
- Interest Rate Volatility: A 0.6% rise in gilt yields could erase the entire surplus buffer, as debt interest costs alone account for £10.1 billion of the projected deficit reduction.
- Global Trade Disputes: A 20 percentage point tariff hike between major economies could shrink the surplus to near-zero, with UK GDP falling by up to 1%.

The Data Behind the Uncertainty

The yield on UK government bonds (gilts) has surged by 0.5 percentage points since October 2024, reflecting investor nervousness over fiscal sustainability. This volatility underscores the sensitivity of the UK’s debt service costs to interest rate fluctuations—a critical vulnerability given the £2.4 trillion debt stock.

Implications for Investors

The OBR’s warnings highlight two key risks for portfolios:
1. Currency Fluctuations: A failure to meet fiscal targets could weaken the pound, as confidence in UK debt diminishes.
2. Bond Market Volatility: Gilts, already pressured by rising yields, face further strain if fiscal credibility falters.

Meanwhile, equity markets may see sector-specific impacts. Infrastructure stocks (e.g., construction firms) could benefit from planning reforms boosting GDP, while public services companies (e.g., healthcare providers) face headwinds from welfare cuts.

Conclusion: A High-Wire Act with No Safety Net

The Chancellor’s fiscal rules are technically intact, but the OBR’s stark probability estimates—closer to a coin toss than a sure bet—reveal a precarious reality. With borrowing projected to remain above £70 billion annually through 2029-30, and PSNFL peaking at 83.5% of GDP, the UK’s fiscal position is more fragile than its headline numbers suggest.

Investors should brace for continued volatility. The £9.9 billion surplus buffer is less than a third of post-2010 averages, and risks like a 0.6% interest rate shock or a 1% GDP hit from trade disputes loom large. As the OBR notes, “the fragility of the fiscal position is unprecedented”—a stark reminder that fiscal rules are only as strong as the risks they can withstand.

In this climate, portfolios should prioritize diversification, with allocations to inflation-protected bonds and defensive equities to hedge against fiscal uncertainty. For the UK, navigating this tightrope will require more than policy tweaks—it demands a structural shift in productivity and global economic stability, neither of which are guaranteed.