UK Autumn Budget seen delaying tough calls to 2027 as headroom shrinks

UK Chancellor John Healey plans to postpone significant fiscal decisions until 2027 in his first Budget on October 28, according to UBS. This delay is due to shrinking headroom in the government's borrowing rules, which may have reduced from £23.6 billion in March to around £10 billion. Higher borrowing costs and interest rate expectations have eroded this cushion.

UBS predicts Healey will aim for a buffer of £15 billion, above the March 2025 low of £9.9 billion. The government must first settle a £7 billion shortfall, including a £4.7 billion gap in a defense plan and £2 billion for cost-of-living support. An 80 to 90 basis point upward revision of the OBR’s rate assumptions could cut headroom by £12 billion to £13 billion.

This could be partially offset by stronger tax receipts from higher inflation. UBS expects smaller measures, such as wealth, inheritance, or property taxes, extended national insurance to pensioners, or higher bank taxes. Breaking the budget rules could lift 10-year yields by 25 to 50 basis points, with betting markets giving about a 20% chance of an early election next year.