Speculation over the contents of next month’s Budget has reached fever pitch, and it’s only going to ramp up from here. This is not idle curiosity; with businesses still adapting to the confidence-sapping and job-smothering fallout from last year’s Budget, there is now a genuine fear that what remains of our economic resilience could be crushed by the government’s need to fill an almighty black hole in the public finances.
A new report by economists at Barclays and the Institute for Fiscal Studies points out that while Rachel Reeves is busy blaming Brexit, Liz Truss and “austerity” for today’s mess, the situation is in fact largely “of her own making.”
Yesterday, Reeves conceded for the first time that tax rises are on the cards (making her look like the last person to realise) telling Sky News “we’re looking at tax and spending” while a Downing Street spokesperson refused to rule out increasing income tax or VAT, hikes to either of which would breach Labour’s manifesto.
It is now accepted that the tax burden will simply increase over the course of this parliament. Yesterday the International Monetary Fund said that taxes in the UK will rise at the fastest pace of all G7 economies. Government revenues, largely from taxes, will account for 40.6 per cent of GDP by 2029, the IMF predicted, up from 38.3 per cent in 2024 when Labour came to power.
This focus on tax rises is understandable (and depressing) but the other side of the coin is spending cuts, and economists are increasingly of the view that Reeves will have to demonstrate some serious discipline at the Budget if she is to retain the confidence of the bond market.
Moyeen Islam, fixed income strategist at Barclays, is clear: “Without reductions in spending, to deliver the sums required solely via tax increases could require breaking manifesto promises.” He added: “That need for credibility-enhancing policy choices is the price that the government must be seen to be paying in order to provide reassurance to a wary market that has been quick to move sharply on any perception of rolling back on fiscal policy choices.”
Jordan Rochester of Mizuho – formerly of Nomura – yesterday spelt out seven possible market reactions to the Budget based on the amount of fiscal headroom Reeves generates and, crucially, how she gets there. Two of these scenarios were broadly positive, one was neutral and four were negative. Two of them were very negative indeed. As flowcharts go, it was sobering.
Labour risks presiding over a situation where meaningful spending cuts are deemed politically impossible and so tax rises are deemed the obvious response – not just at this Budget, but at all future Budgets.