UK Watchdog Took Window for Budget Forecast During Gilts Rally
TL;DR
The UK's fiscal watchdog shifted its interest-rate forecast window to a period of falling gilt yields, saving the government £2 billion. This coincided with the Chancellor's inflation-fighting signals, which boosted market confidence amid a £20 billion fiscal deterioration.
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Britain’s fiscal watchdog moved the interest-rate window used to estimate government borrowing costs for the budget to a period that coincided with a steep fall in gilt yields.
In a statement, the Office for Budget Responsibility said it originally used the “average interest rates and market determinants” from the 10 working days to Oct. 10 but changed that to the 10 days to Oct. 21 for the final pre-budget measures forecast handed to the Treasury on Monday.
Bloomberg Economics calculated that shifting the so-called “window” to capture the fall yields that began on Oct. 10 will have saved the Chancellor about £2 billion. The 10-year gilt yield averaged 4.59% in the period through Oct. 21 compared with 4.71% through Oct. 10.
The period also coincided with strong signalling by Chancellor of the Exchequer Rachel Reeves that she would tackle inflation at the budget and potentially double her fiscal headroom £20 billion ($26.3 billion). Both policies were warmly welcomed by markets and helped drive the gilt rally.
Reeves needs every penny she can get as the OBR has estimated that there has been a £20 billion fiscal deterioration since the March Spring Statement, due to weaker growth, higher borrowing costs and policy U-turns.
Given her ambition is to raise the headroom by £10 billion, that leaves her having to find £30 billion in tax or spending cuts. She ruled out raising income tax after the OBR presented her with an improved budget outlook on Monday, Bloomberg reported.
The OBR said it had take the decision due to “the time between the closure of the pre-measures economy forecast” on Oct 31 and the budget on Nov 21. It took the decision at the start of November.