Rachel Reeves’s £22bn bailout under threat of U-turns and low migration

Rachel Reeves’ carefully constructed £22 billion funding could be eroded by an estimated £14 billion due to policy shifts and a sharper-than-expected fall in net migration, raising fresh questions about the strength of the chancellor’s budget strategy.

Markets initially welcomed Reeves’ November budget, which doubled the government’s budget and was seen as a sign of good behavior after months of public finance worries. However, less than two months later, analysts are warning that the margin for error is already narrowing.

According to calculations by Bloomberg, a combination of soft tax measures and weak incomes driven by migration could reduce the savings to less than £8 billion by the end of the forecast period.

The fiscal head refers to the surplus between government revenue and spending in a target year, in this case 2029–30, which Reeves must keep under his budget rules. In November, the chancellor raised taxes by £26 billion, including an £8 billion extension of the income tax freeze, which boosted income from £9.9 billion to £22 billion.

Since then, a series of regressions have begun to reverse on that page. Following growing pressure from the tourism sector – including more than 1,000 pubs that symbolically banned Labor MPs, the government moved to ease the planned increase in business rates for bars, a decision expected to cost around $300 million.

Ministers also relaxed proposed changes to farm inheritance tax, which would increase the threshold at which agricultural property is taxed. That deal is estimated to cost the Treasury a further £130 million.

The biggest risk to public finances, however, comes from immigration. The revised estimates suggest that net migration may underestimate forecasts published by the Office for Budget Responsibility by about 100,000 people per year. Bloomberg estimates that this will reduce tax receipts by around £9 billion in 2029–30 alone, reflecting the fact that economically active migrants often contribute more in taxes than they spend on public services.

Additional pressure may come from defense spending. Prime Minister Keir Starmer has promised to increase military spending to 2.5 percent of GDP by 2027 and 3 percent in the next parliament. However, an analysis reported by The Times suggests there is a funding gap of £28 billion over the next four years to meet that commitment, which equates to around £7 billion a year.

Despite these challenges, financial markets have so far remained calm. UK government bond yields have fallen faster than peers in recent months, reflecting investor confidence in the chancellor’s first fiscal stance.

The question now is whether that confidence will hold if more concessions are made, or if weak immigration and higher spending obligations continue to erode the headquarters Reeves has worked so hard to rebuild.