New Chancellor faces £10 billion headroom headache as public sector finances remain on a knife-edge

Despite a slightly better-than-expected deficit figure for June, borrowing is still £2.7 billion above pre-war forecasts in the financial year-to-date. And with higher energy prices estimated to deliver a £14 billion hit to the public finances, big challenges remain for Chancellor John Healey the Resolution Foundation said today (Tuesday).

Even with good news on borrowing in June, today’s release is a timely reminder for the new Chancellor of the strained position of the public finances. Even though borrowing was £0.3 billion lower than expected in June, the impact of the conflict in the Middle East is estimated to have already reduced Healey’s headroom against the fiscal rules from £23.6 billion at the time of the Spring Forecast to around £10 billion.

This would put Chancellor Healey’s headroom at a historical low relative to the recent average of £29 billion held by Chancellors between 2010 and 2024, though on a par with the headroom Rachel Reeves left herself after her first Budget.

There is an opportunity for this Government to seize the moment and work to put the public finances on a firmer footing. Any new spending commitments must be fully funded from the start.

Elliott Christensen, Senior Economist at the Resolution Foundation, said:

“John Healey begins his time in No.11 with a headroom headache as his margin for error against the fiscal rules is estimated to have fallen to just £10 billion following renewed hostilities in the Middle East.

“Today’s data should be taken as a reminder that the public finances remain on a knife-edge: despite lower-than-expected borrowing in June, the deficit remains off-track for the year-to-date just as the Iran war appears to be ramping up.

“Andy Burnham has promised his Government will be a fresh start and that should include focusing on how to put the public finances on a firmer footing with new policy announcements fully funded.”