Investing.com — The UK Office for Budget Responsibility will deliver its Spring forecasts on March 3, with no major changes to tax or spending policy expected, according to a BofA Global Research in a note dated Wednesday.
The Chancellor’s decision to limit major fiscal events to an annual occurrence, held in Autumn, reduces the likelihood of significant policy shifts alongside the Spring update. A small risk remains of fiscal giveaways ahead of May local elections, the note said.
BofA expects the fiscal headroom to improve by £2 billion, rising from £21.7 billion at the November Budget to roughly £24 billion, though the brokerage cautioned that uncertainty surrounds that estimate.
Lower Bank Rate and gilt yields since November are the primary driver, likely reducing debt interest costs by £5 billion.
Offsetting that improvement are weaker-than-expected growth, lower inflation, a rise in unemployment and policy changes made since November, which together are expected to knock roughly £3 billion off the headroom.
On growth, 2025 GDP came in at 1.3%, below the OBR’s November forecast of 1.5%. BofA expects the OBR to mark down 2026 growth by 20 basis points and project a slightly smaller economy by 2029-30, by 0.2 percentage points, which would modestly reduce the headroom.
Unemployment has edged up to 5.2%, above the OBR’s 4.9% estimate for 2026. Inflation in 2025 printed at 3.4%, slightly below the OBR’s 3.5% forecast, with 2026 inflation expected to be revised down by 10 to 20 basis points.
Borrowing in fiscal year 2025-26 is running at £112 billion through January, £8.3 billion below the OBR’s November forecast, driven by lower government spending and higher self-assessment and capital gains tax receipts.
BofA projects full-year 2025-26 borrowing at £130 billion, against the OBR’s November forecast of £138.3 billion.
For fiscal year 2026-27, borrowing is expected to come in at £109bn, roughly £3 billion below the OBR’s November projection of £112.1 billion.
Fiscal pressures nonetheless persist. Defence spending could rise beyond the planned 2.5% of GDP by 2027, with an increase to 3% of GDP by 2029-30 potentially adding £13 billion to £14 billion to expenditure.
The government has yet to set out funding for an estimated £6 billion gap in special educational needs and disabilities spending by 2028-29.
Net migration, provisionally estimated at 204,000 in the year ending June 2025, down sharply from 649,000, poses a further risk.
The OBR previously estimated that a scenario with net migration 200,000 lower per year could raise borrowing by £13 billion to £20 billion.
Fuel duty uncertainty and the backloaded nature of planned tax rises round out the pressures. “Fiscal pressures haven’t gone away, but we don’t expect them to be addressed in March forecasts,” the BofA note said.
On gilt supply, the UK Debt Management Office will publish its 2026-27 Financing Remit alongside the Spring Forecast. BofA projects gross gilt sales of £235 billion in 2026-27, a reduction of £69 billion from 2025-26, with the DMO raising an additional £15 billion via Treasury bills.
The Gross Financing Requirement is estimated at £262 billion, £13 billion below the DMO’s illustrative projection of £275 billion published in November.
BofA expects issuance to be split 46% in short-dated gilts, 23% in medium maturities, 11% in long-dated bonds and 10% in index-linked debt, leaving 10% unallocated, it said in a note.
The brokerage said supply in the medium-dated sector remains elevated compared with levels seen before quantitative tightening. It added that it favours long positions in UK rates versus Germany and prefers real-curve flatteners.
On sterling, BofA does not expect the Spring Forecasts to generate significant GBP volatility, describing the setup as distinct from the market stress of November 2025.
“Both idiosyncratic vol premium and event risk premium are largely absent,” the note said. The bigger risk to the pound, according to BofA, is domestic political uncertainty around a potential leadership challenge toward end-May, which “is likely to be far more pervasive for GBP than OBR Forecast revisions.”