Leading Indicators | Growth signals strengthen, fiscal space remains tight

Reeves’ fiscal margin remains the third-smallest on record

At the next Autumn Budget, expected in late October or November, Chancellor Rachel Reeves will enter with just £9.9 billion of headroom under her fiscal rules, among the smallest margins on record and well below the £26bn average. The earlier erosion of headroom from higher borrowing costs was only partly offset at the Spring Statement, leaving fiscal space constrained. Markets now see limited scope for giveaways and expect the Chancellor to rely on tax rises to keep debt on a sustainable path.

Hiring intentions at highest in a decade despite tax pressure

Even with tax rises on the horizon, hiring optimism has strengthened for the fourth consecutive month. According to the Lloyds Business Barometer, 62% of firms (up from 60%) plan to expand headcount over the next year, the highest in a decade. Robust staffing intentions, despite higher payroll taxes and wage costs, point to business confidence in demand even as the wider labour market cools.

Stronger business credit demand supports investment outlook

Business borrowing picked up strongly in July, with borrowing by large firms rising from 6.7% to 8.0% and SME’s (small and medium-sized enterprises) borrowing up from 0.3% to 0.9% - the strongest since August 2021. The pick-up in SME demand is particularly notable, as smaller firms are more sensitive to financing costs. Sustained momentum in corporate lending should support investment and reinforce the broader growth outlook.