Rachel Reeves’s £22bn fiscal buffer under threat from U-turns and lower migration

Rachel Reeves’s carefully constructed £22 billion fiscal buffer could be eroded by as much as £14 billion as a result of policy U-turns and a sharper-than-expected fall in net migration, raising fresh questions about the durability of the chancellor’s budget strategy.

Markets initially welcomed Reeves’s November budget, which more than doubled the government’s fiscal headroom and was seen as a signal of discipline after months of concern over the public finances. However, less than two months later, analysts warn that the margin for error is already narrowing.

According to calculations by Bloomberg, a combination of softened tax measures and weaker migration-driven revenues could reduce the buffer to as little as £8 billion by the end of the forecast period.

Fiscal headroom refers to the surplus between government revenues and spending in the target year, in this case 2029–30, which Reeves must preserve under her fiscal rules. In November, the chancellor raised taxes by £26 billion, including an £8 billion multi-year extension of the freeze on income tax thresholds, lifting headroom from £9.9 billion to £22 billion.

Since then, a series of reversals has begun to chip away at that margin. Following mounting pressure from the hospitality sector — including more than 1,000 pubs symbolically banning Labour MPs, the government moved to soften planned increases in business rates for pubs, a decision expected to cost around £300 million.

Ministers have also eased proposed changes to inheritance tax on farmland, increasing the threshold at which agricultural assets are caught by the levy. That concession is estimated to cost the Treasury a further £130 million.

The largest risk to the public finances, however, comes from migration. Revised projections suggest net migration could undershoot forecasts published by the Office for Budget Responsibility by as much as 100,000 people a year. Bloomberg estimates this would reduce tax receipts by around £9 billion in 2029–30 alone, reflecting the fact that economically active migrants tend to contribute more in taxes than they consume in public services.

Additional pressure may come from defence spending. Prime Minister Keir Starmer has pledged to increase military expenditure to 2.5 per cent of GDP by 2027 and to 3 per cent in the next parliament. However, analysis reported by The Times suggests there is a £28 billion funding gap over the next four years to meet that commitment, equivalent to roughly £7 billion a year.

Despite these challenges, financial markets have so far remained relatively calm. UK government bond yields have fallen faster than those of comparable economies in recent months, reflecting investor confidence in the chancellor’s initial fiscal stance.

The question now is whether that confidence will hold if further concessions are made, or if weaker migration and higher spending commitments continue to erode the headroom that Reeves worked hard to rebuild.

Read more:
Rachel Reeves’s £22bn fiscal buffer under threat from U-turns and lower migration