Reeves Looks to Woo Budget Watchdog With Plan to Cut Inflation

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(Bloomberg) — Rachel Reeves should get billions of pounds of extra room in her upcoming budget, UK Treasury officials believe, thanks to her plan to cut household bills and bring down inflation.

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The Chancellor of the Exchequer’s officials have taken their case to the government’s fiscal watchdog and asked that it takes into account measures on energy bills, rail fares and other regulated prices in its budget forecast, according to people familiar with the matter. 

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The Treasury’s argument is that lower inflation will mean lower interest rates, and therefore lower borrowing costs on the government’s substantial debt pile.

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The Office for Budget Responsibility, which is considering the Treasury’s claim, produces the economic forecasts that underpin every UK budget and determine whether a chancellor is abiding by their fiscal rules.

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If the OBR recognizes lower borrowing costs, it could give Reeves an extra £6 billion ($7.9 billion), calculations by Bloomberg Economics Chief UK Economist Dan Hanson show. The judgment is entirely the OBR’s, as the Treasury can only request that the assessment is made.

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Reeves needs every penny she can get to fill a budget hole of as much as £35 billion caused by an anticipated growth downgrade by the OBR, higher borrowing costs since the March spring statement, and policy U-turns on cuts to welfare. 

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A Treasury spokesperson said they would not comment on speculation ahead of the OBR’s forecast, to be published on 26 Nov. The OBR declined to comment.

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Stubborn inflation

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Reeves has pledged to tackle regulated prices at her budget on Nov. 26 to bring down inflation, which remains higher in the UK than any other Group of Seven advanced economy. 

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City economists estimate that her measures could knock 0.5 percentage points off the consumer prices index, freeing the Bank of England to cut rates more aggressively. Rates are currently 4%, equal highest in the G7, and inflation at 3.8% is almost twice the bank’s 2% target.

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Officials are hopeful the OBR will respond because it made a similar adjustment, in the opposite direction, last year. In the October 2024 budget, the watchdog added 0.25 percentage points to the market path used in its forecast for both BOE and gilt rates on the grounds that “the full extent of discretionary fiscal easing in this budget is unlikely to have been anticipated by market participants.” The adjustment underestimated the market reaction after the budget.

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The Treasury believes it has a strong case for a similar intervention this time because there has been a market repricing since the OBR’s forecast for borrowing costs was fixed around October. 

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Markets moved because investors recognized that big tax rises, expected to total between £20 billion and £30 billion, will hit growth and reduce inflation. On top of which, Reeves made it clear she plans to engineer inflation down by attacking prices that are under the government’s control.

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“We do want to bear down on the costs that people face,” she said in October. “Where government has a role is in areas of regulated prices.”