It might not have been a Budget, but the Chancellor may well wish that it had been. Constrained by her fiscal rules and her own insistence that yesterday’s statement would not constitute a major event, Rachel Reeves was left shuffling the few cards she held in search of a better hand.
The search was in vain.
Despite deploying the kind of rhetoric normally associated with a full-fat fiscal event, by the time the Chancellor sat down it was hard to see what had changed. It’s true that relatively modest policy changes (such as a few billion shaved off a welfare budget that’s expected to reach £70bn by 2030) will have political ramifications for Labour, and it’s also true that the government does appear to be moving the dial on house building, contributing to future growth.
But when it comes to the bigger picture, just consider a few sobering facts.
Public spending as a percentage of GDP will still be higher in the years ahead than at any time since 2010 (having been on a downward trajectory, until the pandemic hit) and the OBR made clear yesterday that public sector net borrowing will still be £8bn higher, on average, over the next five years than was forecast last Autumn. Public sector net debt will also come in around £30bn higher by 2030 than was predicted at the time of the last Budget, due to additional borrowing. The fiscal watchdog also said that growth in output between 2023 and 2029 will now be half a percentage point lower than in October’s forecast and the level of trend productivity will be more than one per cent lower by the end of that period. Economic growth will be a pathetic one per cent this year, and is not forecast to hit even two per cent ahead of the end of this decade.
That’s the backdrop against which the Chancellor made considerable effort to reinstate a modest £10bn of fiscal headroom, which had been wiped out by low growth and high borrowing costs since last October. She’s put us back to square one.
If £10bn wasn’t enough room six months ago, it’s unlikely to prove sufficient for the next six months, either. Indeed, the OBR says that, given the state of our domestic economy – and global uncertainty – it won’t take much to turn that surplus into a deficit. And how would Reeves manoeuvre herself back within her fiscal rules? The smart money’s on tax rises.