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Britain’s chancellor Rachel Reeves did not want this week’s UK Spring Statement to be a fiscal event, but it has veered close to becoming one. Her choices in last autumn’s Budget are partly to blame.
In October, she left £9.9bn of headroom against a reformed fiscal rule to balance the current budget by 2029-30. That was low by historic standards. Labour’s misguided campaign promise not to raise taxes on working people also hemmed her in. In the end, an increase to employers’ national insurance contributions boosted revenue projections, but not without undermining business confidence and economic growth. The government also backloaded dubious departmental spending restraints to reduce expenditure forecasts.
In the months since, a combination of weaker economic forecasts and higher borrowing costs have wiped out the chancellor’s puny fiscal space. UK bond yields have been pushed higher by a mix of jitters over Britain’s debt path and a global bond sell-off triggered in part by US President Donald Trump’s disruptive economic agenda.
On Wednesday, Reeves will have less room for error. Bond markets are watching closely. UK bond sales are expected to rise to a near record £310bn next year, according to a Financial Times estimate. And gilt yields have risen further in recent weeks as markets factor in plans for higher public spending in Europe.
The government has already unveiled a plan to make £5bn in savings from disability benefits, in a package that combines sensible reforms with harsh cutbacks. With the growth effects of the government’s recent efforts to slash red tape still hard to ascertain, Reeves is expected to make up the remaining shortfalls by pencilling in further future spending cuts to strained public services. She may also extend a freeze on income tax thresholds, among other tax tweaks, to boost the revenue forecasts.
Either way, the chancellor ought to keep three things in mind if she wants bond markets to remain on her side. First, it would be prudent to leave greater headroom this time around. Global economic turbulence means the Office for Budget Responsibility’s forecasts for growth, interest rates and inflation — and hence, debt — will be particularly volatile.
Second, in order to be credible, even tighter spending plans would need to come with details of where cuts will land and clear initiatives to raise public sector productivity. Cutting back the aid budget also seems unlikely to be enough to finance plans to raise defence spending. Given Reeves’ determination not to make Wednesday’s statement too much like a Budget, sensible cost-cutting reforms, such as slashing the triple lock on state pensions, appear to be ruled out.
Third, the midcourse correction in public finances that Reeves will need to outline this week should be a wake-up call that the government must do better in its efforts to boost growth. The October Budget did little on this front. Short-term fiddling and pencilling in unrealistic cuts to public spending is neither a sustainable nor a credible way to conduct fiscal policy. The OBR needs evidence that growth is forthcoming to raise its revenue projections. That means Labour must double down on generating productivity improvements via its forthcoming industrial strategy, planning reforms and ongoing deregulation drive. A blueprint for simplifying the tax system would help here too.
Tougher choices still will await the chancellor in this autumn’s Budget if she does not heed the lessons of the last one. Reeves recognises that “the world has changed” since October. She must now ensure Britain has the fiscal credibility and growth agenda to match it.
