Ruth Gregory, economist at Capital Economics, said the latest gains in yields and rate expectations would, if sustained, leave the chancellor with just £1.1bn of headroom against the chancellor’s key budget rule, which requires her to cover current spending — excluding investment — with tax receipts.
“If the OBR judges in March that the main fiscal rule is broken, to maintain fiscal credibility, the chancellor may need to take some form of action,” said Gregory. “So there is a risk that to meet the main fiscal rule, extra revenue-raising tax hikes or spending restraint will be required. Either way, there appears to be a risk that fiscal policy is tighter than otherwise.”