Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Britain’s public finances are still a problem in need of a serious fix. After higher borrowing costs and weak growth knocked her spending plans off course, chancellor Rachel Reeves pulled off a makeshift repair job at Wednesday’s Spring Statement. She restored a £9.9bn buffer against her fiscal rule to balance current spending, and for now the bond markets seem contented.
But there is little room for complacency. There are doubts over whether the chancellor’s corrective measures can even yield the necessary savings. Global economic volatility then adds further uncertainty around the Office for Budget Responsibility’s deficit and debt projections. This means that barring substantive improvements in the coming months to the government’s evolving growth agenda and public efficiency drive, the chancellor will face unenviable trade-offs at the main fiscal event in the autumn.
Reeves’ tweaks on Wednesday were largely cosmetic. She backloaded spending cuts, on already strained departments, towards the end of the current parliament — a well-worn procrastination strategy of bygone chancellors. Reallocating part of the overseas aid budget to capital investment in defence also helped to reduce the forecasts for day-to-day spending. Further savings via welfare reforms and a slight bump to tax compliance efforts are welcome, but are not guaranteed to deliver as much as estimated.
The chancellor may rue the decision not to leave greater headroom against her fiscal rules. Her current cushion is low by historic standards, and long-term spending pressures are rising. Prime Minister Sir Keir Starmer has set out ambitious plans for further increases to defence expenditure. Ageing demographics will add to Britain’s healthcare and pensions tab.
Risks to the growth outlook — and hence tax revenues — are mounting too. The OBR estimates, for instance, that a 20 percentage-point rise in tariffs between the US and the rest of the world would knock out most of Reeves’ fiscal buffer. Another concern is a possible downgrade to the fiscal watchdog’s long-optimistic potential productivity forecasts.
This leaves Britain’s public finances on a precarious path. Revisions to inflation and interest rate forecasts might help, but changes in the UK’s growth projections will make the most difference. The OBR’s modest boost to potential output as a result of the government’s planning reforms is good news. But Labour will need to think bigger to improve the outlook for the autumn Budget.
The government should go further in its efforts to improve trading ties with the EU, and start delivering on its infrastructure investment plans as well as its broader industrial strategy. It should be more ambitious on tax reform, simplifying the system and ensuring it incentivises work and investment. It will also have to be more daring in cutting costs, for instance by retiring the excessive “triple lock” on state pension payments.
The government’s capacity to pull these various growth and savings levers, and have them positively scored by the OBR, between now and the autumn Budget is limited. But any efforts would at least ease the difficult trade-offs it will otherwise face. Indeed, if forecasts do turn against it, Labour’s ability to raid departmental budgets further is restricted by existing cutbacks, political pressures and bond market credibility. That could strong-arm the chancellor into tax rises, which would only undermine the nation’s ability to foster growth.
Labour was elected on a promise to deliver growth and fiscal stability. Nine months into its term, the economic outlook remains downbeat, and the practice of making small book-balancing tweaks continues. The chancellor has carried out a fiscal holding operation. Next time, she must be bolder.
