No special budget red box has been ordered for Rachel Reeves, who became the first woman to brandish a red box outside No. 11 on Wednesday morning.
There’s no such frills, very few jokes, and don’t expect a big rabbit to come out of a hat.
The number crunchers, bean countrs and abacus economists, so much ridiculed by Liz Truss, have regained control. The repurposed red box holds the coffin budget.
In fact, it could be defined as the complete opposite of Prime Minister Truss and Premier Kwasi Kwarteng’s infamous mini-budget two years ago.
They infamously rejected the Office for Budget Responsibility’s (OBR) offer of forecasts, which Mr Truss later determined was part of a “deep state” plot against the Prime Minister’s office.
This time, the OBR has carried out a full 10-week back-and-forth audit of both the public finances and all the tax and spending policy measures Reeves is planning, following what has previously felt like an extended schedule. I added something. Preparation of budget.
The long wait, three months after the election, has cast a cloud over consumer and business confidence, and ultimately the economy. Business leaders tell me they can deal with higher taxes, but prolonged uncertainty will make the economy feel worse. Some believe they missed an opportunity to jump on a key turning point in the summer when, after three years of crisis, a new stable government took office and interest rates finally fell.
Still, a turning point may yet come. This budget forms part of an important global economic axis. Years of increased government spending and borrowing and higher interest rates to curb rampant inflation have given way to the opposite. Loose monetary policy, meaning lower interest rates, and tighter fiscal policy, meaning higher taxes and borrowing restrictions, are the new normal.
The budget includes a wide range of tax increases. It might have been easier to list the things that don’t rise. As I have reported, the most notable will be the increase in employer National Insurance Contributions (NICs).
Mr Reeves heard that in July he was advised internally to reverse the “unfunded” 2% cut to employee national insurance introduced by the Conservatives. But she was adamant that she could not violate her campaign promise not to establish this type of NIC.
Of course, there will be heated debate as to whether raising an employer’s NIC is the same thing. Labor insiders pointed to a footnote in election documents that made it clear that the manifesto pledge only applied to employee NICs, and said they had been attacked on this point in Tory advertisements and speeches. . This means that the language in the Labor Party manifesto has been carefully crafted to take into account the rise in employer NICs.
Last week, at the International Monetary Fund (IMF) meeting in Washington DC, I spoke directly to the Prime Minister about why he had not been more clear with voters about the potential for wider tax increases, including on National Insurance. I asked a question.
She said there are three factors behind this tight budget. She reiterated her calculations of a “£22bn black hole” that would be inherited. She says she inherited it from her predecessor but did not foresee it. She now says the deficit will continue “into the future.”
He said the OBR would publish a review into how the overspending was “allowed to occur” alongside the draft budget. The Treasury views this as an important subplot of the main story in Wednesday’s Budget.
Reeves also pointed to compensation payments for infected blood and the Horizon Post Office scandal, saying, “The previous administration didn’t set aside money for that.”
Thirdly, given the current state of public services such as prisons and health services, and the new government’s promise of “no spending”, she said that the UK could not continue on its current path in terms of public spending. told. It’s a return to austerity. ”
What we have heard so far about the Budget sounds pretty austere, with the Chancellor defining austerity as real cuts in government departments. It appears that each department will receive additional fees to address the increased cost of services.
The trade-offs in her budget will depend on her new fiscal rules. New rules governing borrowing for investment, the Investment Rules, replace the previous debt rules and could reverse £20bn of planned cuts to spending on large capital projects. becomes.
The new broader debt measure must fall within five years. But it is new “stability rules” that will be binding on Wednesday. All day-to-day expenditures for each sector, such as welfare and interest on loans, will have to be covered by tax revenues over a period of time that has not yet been specified. This could be a really tough rule, much tougher than the Conservatives’ rules. Borrowing is for investment only.
These two rules form the framework not only for this budget but for the next five years, and affect every penny the government spends. Labor calculates that its supermajority is rooted in people’s desire to clean up underperforming public services, such as the NHS, and the declining quality of the public realm, from town centers to transport and housing. are. The real “black hole” in this view is in public services. The “fiscal fiction” of unrealistic spending plans becomes fiscal fact.
The strategy here is to signal an overwhelming tolerance for political pain to the markets that lend money to the Treasury by mandating that the spending gap be bridged by significant tax increases. Essentially, the majority will be used to ensure a surplus in “current” spending. Although some taxes will rise, the return should help keep interest rates down for households, businesses and the government itself.
As one prominent central banker said on the sidelines of an IMF meeting, what is important from the perspective of market credibility is not only the amount borrowed, but also the consistency of the borrowing story and strategy.
A new prime minister needs to establish financial credibility, but as it turns out, trust is notoriously difficult to gain and much easier to lose. That is the purpose of this voluntary rule. But in recent years, the prime minister has also struggled with his political credibility. Several had been on the job for too short a time to even prepare a formal budget.
It is not an absolute assumption that all budget proposals are actually enacted by a rebellious and unruly ruling party. Across the Channel, that is precisely France’s problem, and Mr Reeves’ counterpart Antoine Armand will have to convince him that as a minority government it can actually pass tough policies. Rachel Reeves has no such problem.
Indeed, the prime minister had a moment of reflection at an event where he addressed bankers, MPs and senators at the British ambassador’s residence in Washington. Exactly two years ago, Mr Kwarteng gave the same speech amidst confusion over the mini-Budget, including jokes about his role sharing with Isaac Newton in solving the historic pound crisis. In the aftermath of Kwarteng’s “financial incident”, directors of Britain’s clearing banks have had to reassure their trading partners that the UK is “okay”. Finance ministers from developing countries also half-joked about how the once-great Britain was now in an economic crisis.
It was an abomination for the prime minister, who was seconded to the British embassy as an economist during Argentina’s debt crisis 20 years ago.
That’s why she and her team are expecting outrage from wealthy taxpayers and bad headlines from some newspapers Thursday morning. But the flip side of that will be relief for struggling users of many public services, especially as the Treasury embarks on a long-overdue program of long-term investment in the future of the UK economy. The key is peace in the financial markets.
It’s a budget that will be unpacked and selected over the next few months and perhaps years.
