UK Fiscal Headroom Set for Sharp Decline Ahead of Autumn Budget

The UK's fiscal headroom is on track to fall below the £23.6 billion estimated by the Office for Budget Responsibility (OBR) in March, according to analysts at UBS.

This reduction is attributed to higher interest-rate and inflation assumptions following the escalation of the Middle East conflict, which erodes the government's room to spend within its fiscal rules.

UBS estimates that if the OBR sets its forecast cutoff date around September 2, the Bank of England's policy rate and 10-year gilt yields would be approximately 70 basis points higher than in March, reducing fiscal headroom by around £10 billion or 0.3% of GDP.

A related upward revision to the inflation outlook could cut headroom by a further £3 billion or 0.1% of GDP, although this could be offset by stronger tax receipt assumptions.