When Rachel Reeves announced her intention to hold just one “fiscal event” a year, there was much eye-rolling. Previous chancellors had made the same pledge, designed to encourage long-termism, but found it impossible to keep.
Reeves has just about done so – there will be no major tax changes in her Spring Statement today. But this is now an event far larger than the financial “update” that she originally planned.
There’s an obvious reason for this: economic conditions have significantly worsened since last October’s Budget. The Office for Budget Responsibility is now expected to forecast growth of just 1 per cent this year, down from 2 per cent (remember, despite its gloomy reputation, the OBR has usually erred on the side of optimism).
Reeves, as politicians must, is seeking to turn adversity to her advantage. First, she is arguing that this proves the need to go “further and faster” on growth – bulldozing opponents of deregulation, a third Heathrow runway and new North Sea oil and gas fields. Second, as I wrote on Monday, she is now framing herself as “the security chancellor”. Reeves will declare that this is an age that demands “active government” and announce an extra £2.2bn in defence spending next year.
But though the politics are clear, the economics are nightmarish. The £9.9bn of “headroom” that Reeves maintained above her fiscal rules has been wiped out (it’s now around -£5bn). This is what prompted the hurried attempt to make £5bn of welfare cuts in advance of today’s statement.
But on that front, the OBR had some unwelcome news for Reeves. It deemed that the government would save just £2.9bn from the cuts, forcing the Chancellor to impose an additional £500m: a freeze in Universal Credit incapacity benefits – already halved – until 2030 and a cut in the basic rate of UC in 2029 (you don’t imagine that Liz Kendall will be thrilled).
This is one instance of a general rule: cuts often produce fewer savings than hoped (just ask George Osborne). But cuts, totalling around £15bn, are what Reeves is relying on. The Chancellor will narrow the spending “envelope” for future years – intensifying the fight among cabinet ministers for scarce resources (as I reported earlier this week, unprotected departments have been asked to model real-terms cuts of between 5.7 per cent and 11.3 per cent).
Talk of a return to austerity is overstated. Reeves increased day-to-day public spending by £190bn in her Budget and capital investment by £100bn (meaning smaller future increases take place from a far higher baseline). But as cabinet ministers are privately warning, in areas that face rising demand – such as social care, prisons and children’s services – real-terms cuts will have painful consequences.
That’s why one question will dominate the aftermath of Reeves’ statement: will you raise taxes at your next Budget? This might seem surprising. The Chancellor used her first Budget to increase taxes by £41.5bn (the largest rise as a share of GDP since 1993). But remember, around half of that simply restored the UK to its position before Jeremy Hunt cut National Insurance from 12p to 8p (at a cost of £20bn).
If faced with a choice between breaking her fiscal rules or raising taxes, expect Reeves to choose the latter. The spectre of market unrest haunts the Treasury. Though the Truss debacle was a political gift to Labour, it was also a warning that there are hard limits on UK fiscal policy.
One can easily imagine Reeves arguing that she has exhausted all alternatives – pointing to the cuts above – and must now reluctantly raise taxes again. The Chancellor’s hope is that improved growth (there is some cautious optimism in the Treasury) will spare her from doing so. At the very least, she will strive to keep her pledge to freeze income tax, VAT and National Insurance (for employees). But in politics, if something looks unsustainable it very often is.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Britain’s AI delusion]
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