The Chancellor's strategy to balance the nation's books faces a severe threat from a potential collapse in the artificial intelligence stock market frenzy, official forecasts have revealed.
The £26 Billion Borrowing Threat
For the first time, the Office for Budget Responsibility has modelled how a dramatic correction in technology shares could deliver a devastating blow to public finances. Experts warn that a burst in the AI 'bubble' could trigger a £26 billion borrowing shock, severely hobbling Rachel Reeves' ability to meet her fiscal targets.
This alarming scenario would potentially force the Government into making an unwelcome choice between raising taxes or cutting public spending, demonstrating how volatile trading patterns on Wall Street could directly impact households across the United Kingdom.
Global Warnings and Worst-Case Scenarios
The OBR's analysis follows similar cautions from both the Bank of England and the International Monetary Fund about the potentially damaging consequences if the AI-driven rally in US stock markets suddenly reverses. The watchdog's worst-case 'global correction' model anticipates a 35 per cent slump in both global and UK share prices.
Such a crash would significantly reduce household wealth and company valuations while simultaneously creating what the OBR describes as a 'sharp fall in confidence'. The combined effect would knock 0.6 per cent off gross domestic product within a couple of years as consumers rein in spending and businesses delay investment plans.
Impact on Fiscal Headroom and Tax Receipts
The financial damage would be most acutely felt in the 2027/28 financial year, with tax receipts taking a £27 billion hit. This would leave borrowing £26 billion higher than currently forecast, dramatically narrowing the Chancellor's crucial fiscal 'headroom'.
Currently estimated at £22 billion, this financial buffer – the amount forecast to remain after meeting borrowing and spending targets by 2029/30 – would be slashed to just £6 billion in the event of a severe AI market correction. Although the impact would moderate over the subsequent two years to a £16 billion deficit, it would still represent a massive setback for the Treasury's fiscal plans.
The OBR's warning coincided with the European Central Bank raising its own concerns about what it termed 'stretched' market valuations. It suggested that 'fear of missing out' might be fuelling the extended rally, which remains heavily concentrated in the so-called 'Magnificent Seven' US tech stocks: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
While these companies have seen their values surge amid investor excitement about AI's transformative potential, critics increasingly warn that valuations have raced too far ahead of reality, creating a bubble whose collapse could have devastating financial consequences far beyond the technology sector.
