Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Expectations for Britain’s autumn Budget on Wednesday are decidedly downbeat. Few anticipate that chancellor Rachel Reeves will unveil the productivity-boosting or cost-cutting measures the country so desperately needs to escape from its rut of sluggish growth, shaky public finances and rising taxes. But, after endless rumours and U-turns — which have damped hiring and investment since the Labour government took office in July last year — businesses and markets are, for now, willing to settle for the unspectacular: a package that raises enough revenue to silence speculation and restore a modicum of stability.
With the bar set so low, Reeves must be doubly sure she clears it. She has already restated her commitment to meet her main fiscal rule to balance current spending by 2029-30. However, gilt investors are unlikely to be reassured unless she significantly improves the meagre £9.9bn of headroom she has previously maintained against it. In practice, this means the government could need to find up to £25bn-£30bn in savings and revenue to keep bond markets onside.
How she fills that gap is equally important. After the government failed to win backbench support for welfare reform in the summer, investors know it is too soon for the chancellor to unveil a credible plan to make substantive cuts to the UK’s rising benefits bill, however necessary these may be. The Treasury has briefed that an extra £1.2bn would be recouped from cracking down on fraud and error in the social security system, but some of this will only be in the next parliament.
That leaves taxation to do the heavy lifting once again — only a year on from Reeves’ vow to avoid significant tax rises. After rowing back on plans that would have broken Labour’s manifesto pledge not to raise income tax rates, a sub-optimal mix of smaller levy increases now looks likely. To limit the damage and win investors’ approval, these measures must be calibrated.
First, the package must generate clear, credible revenue streams that begin to flow quickly. Second, Reeves should avoid measures that meaningfully add to inflation. Supporting the Bank of England’s efforts to cut interest rates would help to keep bond yields contained. She must limit additional burdens on employers, investors and mobile high earners, too. All these groups are still reeling from last year’s tax rises. Further increases would undermine economic activity and future revenue flows. As it stands, 45 per cent of UK top earners’ salaries goes towards taxes and social contributions.
Meeting these criteria with a “smorgasbord” of small revenue-raisers will be difficult. But Labour could offset any growth-damping or inflationary effects through other initiatives. Slowing increases in the minimum wage and rethinking day-one workers’ rights legislation would, for instance, help reduce business costs. The private sector would also welcome an upbeat vision for tax simplification, reducing welfare costs and raising productivity, including more ambitious efforts to streamline planning.
Even if Reeves manages all this, it still may not be enough to revive animal spirits, avert future tax rises or restore her economic credibility. At best, it would steady the ship and buy her some time to pursue any wider reforms she has sketched out.
Fiscal events do occasionally deliver positive surprises — and if ever there were a moment to confound expectations, it is now. Without a bold move that signals genuine intent on growth and cost-cutting, this Budget will remain an exercise in damage limitation, fixing problems that despite its dismal inheritance are partly of the government’s own making.