Forget the Chancellor’s headroom and watch the markets

It is a misconception that the fiscal support to counter the energy shock will be determined by how much headroom Reeves has against her fiscal rules. The true constraint on the Chancellor is the markets. And here it is less about rigid headroom metrics and more about context and confidence. The context now is that the UK is entering this energy price shock with its debt dynamics in a fragile state. Against this backdrop, a 2022-style loosening of fiscal policy that adds to the already extensive inflationary pressure would be asking for trouble, even in our adverse scenario.