There was no special Budget red box assigned to Rachel Reeves when, on Wednesday morning, she became the first woman to score outside Number 11.
There won’t be any frills like that, just a few jokes and don’t expect a big rabbit out of a hat.
Number crunchers, nut counters, and abacus economists, so mocked by Liz Truss, have taken back control. In the Red Box the reuse will be a budget boffin.
Indeed, it can be defined by being the polar opposite of everything in Truss and chancellor Kwasi Kwarteng’s famous mini-Budget two years ago.
He rejected the Office for Budget Responsibility’s (OBR) forecast offer, with Truss later ruling the forecast was part of a “deep state” conspiracy against his office.
This time the OBR has carried out a comprehensive 10-week, back-and-forth audit of the public finances and all of Reeves’ planned tax and spending policy measures, adding to what feels like a previously drawn-out timetable. Budget preparation.
The three-month wait, after the election has affected consumer and business confidence, as well as the economy. Business leaders say they can deal with tax hikes, but uncertainty is an economic killer. Some think it is a missed opportunity, after three years of crisis, to jump on a significant summer turning point, with a new stable government and interest rates finally falling.
However, the turning point could come now. This budget is part of a significant global economic pivot. Years of higher government spending and debt, along with higher interest rates to curb rampant inflation, have given way to the opposite. Looser monetary policy, i.e. lower interest rates, and tighter fiscal policy, or higher taxes and borrowing limits, are the new normal.
The Budget box is a wide range of tax increases. It might be easier for the list to never go up. The most important, as I reported, is the increase in the National Insurance Contribution (NIC) of employers.
I understand that Reeves was advised internally in July only to reverse the “unfunded” 2% cut for employees’ National Insurance introduced by the Conservatives. But he still cannot break his election promise not to raise this form of NIC.
Of course there will be a row about whether to raise the employer’s NICs amount for the same thing. Labor insiders show a footnote in the electoral material that explains the commitment of the manifesto only applied to NICs workers, and said they were attacked on this point in Conservative ads and speeches. This means that the wording of the Labor manifesto was carefully crafted to increase the employer’s NIC.
Last week, at a meeting of the International Monetary Fund (IMF) in Washington DC, I challenged the chancellor directly on why he had not been clear with voters about possible widespread tax increases, including National Insurance.
He said there are three factors in this difficult Budget. He repeated the calculation of the “£22bn black hole” he had inherited – which he said he inherited from his predecessors but did not foresee. He now says the deficit will continue “into next year”.
He said the OBR would publish a review of how overspend was “allowed to happen”, alongside the Budget. The Treasury sees this as an important sub-plot to Wednesday’s main Budget narrative.
Reeves also pointed to compensation payments for infected blood and the Horizon Post Office scandal saying “the previous government didn’t give us the money”.
Third, Britain cannot continue on the current path of public spending, he said, because of the state of public services, such as prisons and health services, and the new government’s promise that “there will be no. return to austerity”.
What I’ve heard so far about the Budget seems to be tough, but the chancellor defines austerity as real-terms cuts in government departments. It appears the department will get a top-up to deal with rising service charges.
The trade-offs in his Budget are driven by his new fiscal rules. New rules governing loans to invest, “investment rules” will change the previous debt rules, thus reversing the planned cut of £20bn to spend on major capital projects.
The new, broader debt must fall within five years. But the new “stability rules” will be a constraint for Wednesday. All daily spending in the department, welfare and debt interest, must be financed by tax revenue during a certain period, which has not yet been determined. This can be a pretty tough rule, tougher than the Conservative rule. Loans are for investment only.
These two rules together will frame not only this Budget, but the next half decade, affecting every cent that the government spends. Labor has calculated that the majority of the landslide is based on a public desire to sort out poor public services, such as the NHS, and reduce the quality of the public realm, from transport to city centers to homes. The real “black hole” in this view is in public services. The “fiscal fiscal” of the unrealistic spending plan will become a fiscal reality.
With the mandate that the spending gap will be filled with significant tax increases, the strategy here is to communicate a high tolerance for political pain to the market that lends money to the treasury. Essentially the vast majority will be used to ensure a surplus in “current” spending. Some taxes will go up, but the return should help keep interest rates down for households, businesses and the government itself.
As one of the famous central banks said on the sidelines of the IMF meeting, what is important about the credibility of the market is not only the amount of loans, but the coherence of the story and strategy regarding the loans.
The new chancellor must establish financial credibility, after all, such credibility is hard to come by and easier to lose. That is the purpose of self-imposed rules. But in recent years, the chancellor has also struggled with political credibility. More than one were in the project for a very short time even have an official Budget.
It is not absolute that all the Budget measures will be taken by the rebellious and unscrupulous ruling party. Via Channel, this is exactly the problem in France, where Reeves’ partner Antoine Armand needs to be convinced that he can carry out tough measures as a minority government. Rachel Reeves has no such problem.
Indeed, at an event in Washington addressing bankers, congressmen and senators at the British ambassador’s house, the chancellor had time for reflection. Exactly two years earlier, Kwarteng had made the same address, amid widespread mini-Budget turmoil, including a joke about his role alongside Isaac Newton, who had solved the historic sterling crisis. As a result of the Kwarteng “fiscal event”, the board members of the British clearing banks had to convince their counterparts that the UK was “OK”. The finance ministers of developing countries were making the same joke about the UK, the old masters, now in an economic crisis.
For the chancellor who, twenty years ago, was transferred to the British embassy as an economist, during the Argentine debt crisis, this is anathema.
That’s why on Thursday morning he and his team are expecting anger from wealthier taxpayers and bad headlines in certain newspapers. But the flip side will be relief for hard-pressed users of many public services, and especially what the Treasury hopes will be a tranquil financial market as he embarks on a long-term long-delayed investment program in Britain’s economic future.
It’s a budget that will be unpacked and unpicked for months, maybe years to come.
