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British Prime Minister Rachel Reeves didn’t want this week’s British Spring statement to be a financial event, but it’s approaching one. Her choices in her budget last fall are partially responsible.
In October, she left £9.9 billion of headroom on reformed fiscal rules to balance the current budget by 2029-30. That was low by historical standards. The workers’ false campaign promises also embraced her, not to raise taxes on workers. Ultimately, an increased employer’s contribution to national insurance helped boost revenue forecasts, but not without compromising business confidence and economic growth. The government has also backloaded suspicious sector spending constraints to reduce spending forecasts.
In the next few months, weak economic forecasts were found and increased borrowing costs wiped out the prime minister’s pure financial space. UK bond yields are being pushed higher by unrest around the UK debt channel, partly caused by President Donald Trump’s disruptive economic agenda, and global bond sales.
On Wednesday, Reeves will have less room for error. The bond market is looking closely. UK bond sales are expected to rise to nearly £310 billion next year, according to Financial Times estimates. Gold leaf yields have also risen further in recent weeks, driven by plans for increased public spending in Europe.
The government has already announced plans to save £5 billion from disability benefits in a package that combines wise reforms with harsh cuts. Reeves is expected to make up for the remaining shortfall by tightening pencils with a still tense reduction in public services. She could also extend the freeze on income tax standards among other tax adjustments to promote revenue forecasts.
In any case, the Prime Minister should keep three things in mind if he wants the bond market to stay on her side. First of all, it would be wise to leave the bigger headroom this time. Global economic turbulence means forecasting budgetary liability for growth, interest rates and inflation, and therefore debt is particularly volatile.
Second, to be reliable, you need to attach details about where more stringent spending plans will land, as well as clear initiatives to increase public sector productivity. Cutting the aid budget seems not enough to fund plans to raise defense spending. Given Reeves’ determination to not resemble the budget, wise cost-cutting reforms, such as cutting down on the state pension triple lock, appear to be ruled out.
Third, the interim fiscal corrections that Reeves needs to outline this week should be a wake-up call for governments to do better to drive growth. The October budget was barely on this front. The short-term mood of unrealistic reductions on public spending and pencils are neither sustainable nor reliable ways to implement fiscal policy. OBR needs evidence that growth is approaching to boost revenue forecasts. In other words, Labour must double the creation of productivity gains through future industrial strategies, planning reforms and ongoing deregulation measures. A blueprint to simplify the tax system is also useful here.
If she doesn’t listen to her final lesson, the prime minister on this fall’s budget still has a tougher choice. Reeves has been aware that “the world has changed” since October. She must now ensure that the UK has an agenda of financial reliability and growth.
