Soaring government borrowing costs, rising inflation from the Iran war energy price shock and unfunded spending commitments have all eroded Mr Healey’s fiscal headroom – a self-imposed guardrail to guide public spending.
Rachel Reeves, the former chancellor, had left £23.6bn of headroom against her fiscal targets in the spring.
However, this is estimated to have fallen sharply to just £5bn, according to analysis from the Resolution Foundation published earlier this week.
The Left-leaning think tank said that the Chancellor’s financial buffer had been reduced because of rising borrowing costs, the effect of funding Andy Burnham’s commitment to end rough-sleeping, filling a £1.7bn a year black hole in the Government’s defence plans and giving teachers an inflation-busting pay rise.
In particular, a global bond sell-off – fuelled by rising inflation and concerns about growing government debts – has been piling pressure on Mr Healey.
Britain recorded the biggest increase in bond yields in the G7 last week. The UK paid on Tuesday its highest rate to borrow on newly issued bonds in more than a quarter of a century.
Mr Smith said that the dent to Mr Healey’s financial buffer from rising government borrowing costs “is only one side of the ledger”.
Despite uncertainty from the Iran war, stocks have powered higher so far this year. Mr Smith said that the increase in London-listed stocks was a “knock-on effect from all the kind of AI boom that you’ve seen, particularly in the US stock market, and that global equities are therefore up a bit”. Higher oil prices have also boosted BP and Shell.
Ms Reeves also benefited from a higher-than-expected stock market at the Spring Statement. Ms Reeves enjoyed a £9bn boost to her fiscal headroom by 2030-31, thanks to forecasts of higher stamp duty on shares and capital gains income.