UK's Reeves budget rule outlook is "on a knife edge," think tank says

LONDON (Reuters) - British finance minister Rachel Reeves might yet have to make changes to her fiscal plans in March, despite a fall in borrowing costs in financial markets from their peak earlier this month, a leading think tank said on Thursday.

The Resolution Foundation said the risk of Reeves missing her budget rule was "on a knife edge" because borrowing costs and expectations about Bank of England interest remained higher than forecast by the government's fiscal watchdog in November.

"In her budget last autumn, the chancellor set out new fiscal rules but left herself very little wiggle room against breaking them," James Smith, Research Director at the Resolution Foundation, said.

Higher government bond yields were on course to add 7 billion pounds ($8.7 billion) a year to debt servicing costs, eating up most of the 9 billion pounds of fiscal headroom that Reeves gave herself in November to meet her rules.

"While other factors will also affect the OBR’s forecast, the chance of the Chancellor falling foul of her fiscal rules remains on a knife edge," Smith said, adding Reeves might have to announce tax increases or spending cuts to get back on track.

Reeves has said she will act if needed when the Office for Budget Responsibility delivers its half-yearly update on the public finances on March 26.

On Wednesday, Reeves spelt out her plans to speed up economic growth in Britain which she hopes will make it easier to meet her rules including a requirement to balance day-to-day public spending with tax revenues by the end of the decade.

($1 = 0.8058 pounds)

(Writing by William Schomberg, editing by Andy Bruce)