The potential collapse of the artificial intelligence (AI) market could lead to a significant £26 billion shortfall in the UK’s public finances, according to the Office for Budget Responsibility (OBR). This development poses a serious challenge to Chancellor Rachel Reeves as she strives to achieve fiscal balance.
Experts warn that a downturn in AI-related stock prices, particularly amongst high-profile companies such as Nvidia, could disrupt the government’s budgetary plans. The OBR’s latest assessment highlights how a reversal in the tech stock rally could substantially affect the UK’s economic outlook. The report marks the first time the OBR has quantified the risks posed by a potential collapse in the AI market.
A “worst-case scenario” modeled by the OBR envisions a 35 percent drop in both global and UK share prices. Such a decline would diminish household wealth and corporate valuations, leading to decreased consumer confidence. The OBR estimates this scenario could decrease the UK’s gross domestic product (GDP) by 0.6 percent within a couple of years, as households reduce spending and businesses delay investments.
Tax revenue projections for the 2027/28 financial year could take a £27 billion hit, pushing borrowing levels £26 billion higher than current forecasts. While the impact may lessen in subsequent years, with a projected £16 billion shortfall after two years, the initial blow would significantly cut into the Chancellor’s budgetary flexibility. Currently, the budget “headroom” — the amount available after accounting for planned borrowing and spending reductions by 2029/30 — is estimated at £22 billion. In the event of a severe downturn in the AI market, this figure could plummet to just £6 billion.
The warnings regarding a potential AI market collapse are echoed by both the Bank of England and the International Monetary Fund, which have expressed concerns about the broader implications of a burst in the US stock market. The European Central Bank has also raised alarms about what it describes as “stretched” market valuations. The ongoing rally in stocks, particularly among the so-called “Magnificent Seven” tech firms—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—has been driven by investor excitement over the transformative potential of AI.
Despite the enthusiasm, critics are voicing concerns that the current valuations may not be sustainable, suggesting the possibility of a bubble that could have far-reaching financial consequences if it bursts. As the market remains volatile, the potential fallout could not only affect investor portfolios but also have significant implications for everyday households reliant on the stability of the economy.
In summary, the future of the UK’s public finances may hinge on the performance of the AI market. As the Chancellor Rachel Reeves navigates these uncertain waters, the need for careful fiscal management becomes increasingly critical.
