It was the week that Rachel Reeves went to Washington, D.C. – and started laying the groundwork for a painful Budget.
Speaking at the annual meeting of the International Monetary Fund (IMF), Chancellor Reeves began to outline the shape of the announcements she will make on 26 November.
She made it clear that both tax rises and spending cuts are on the table to help reverse what is expected to be a shortfall of more than £20bn in the public finances – further emphasising that it will be “those with the broadest shoulders” who pay the most.
Reeves has adopted a strategy of doom and gloom, blaming the likely growth downgrade on the lingering impact of Brexit and the Conservatives’ austerity policies.
The Office for Budget Responsibility (OBR) is understood to have said in the first draft of its verdict on the economy and public finances that productivity will be worse in the future than it had previously expected – with a negative knock-on effect on GDP and the public coffers.
But taking such a downbeat tone also allows the Chancellor to surprise on the upside, with any giveaways in the Budget – such as help for energy bills – set to come as a welcome distraction from the overall state of the economy. Lower global borrowing costs and higher-than-expected inflation will also boost the OBR forecasts, economists believe.
Bad news from the watchdog
There could well be bad news from the OBR as well as good, however. The watchdog has promised to include for the first time an estimate of how the controversial Employment Rights Bill, which imposes new obligations on employers in a bid to boost workers’ job security, will affect the economy and, by extension, the public finances.
The OBR itself has already said that the law is likely to have a “net negative” impact on employment and productivity, with the Government’s own estimates putting the cost to businesses as high as £5bn.
Jane Gratton of the British Chambers of Commerce told The i Paper: “The Government estimates the cost to business of the Employment Rights Bill will be £5bn, but we think it is likely to be much higher. The legislation introduces huge changes and the cumulative impact on firms, particularly SMEs, will be very challenging.”
Those who back the bill, including trade unions, believe that it will boost the economy over the long run by making workers more productive because they feel more secure in their employment. But even its supporters admit it may be difficult in the short term for the OBR to set those benefits against the more immediate costs.
Joseph Evans of the IPPR think-tank said: “When the OBR is scoring these policies, it is a bit unclear if they are going to take account of those potential benefits – and if they don’t, they could produce a more negative forecast than actually comes in reality. If they are overly pessimistic, they could give the Chancellor a bit of a headache.”
When Reeves comes to fill in the fiscal black hole, she has promised not to hike income tax, national insurance, VAT or corporation tax – the four most lucrative levies available to the Treasury. Labour MPs fear that the result will be a “messy” mixture of relatively small tax increases – described by tax expert Dan Neidle this week as “a Scrabble bag of lots of little tax rises” – which risk a backlash from those affected even if they do not raise much money, as happened last year with the decision to impose inheritance tax on farmland.
square POLITICS New workers' rights 'will cost businesses £5bn' - creating Budget headache for Reeves
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One backbencher warned that the Chancellor faces a trade-off between keeping bond markets happy and appealing to voters, saying: “Clearly, the more she prioritises fiscal credibility, the more she risks paying a political price – both with the parliamentary Labour party and the public – even if it’s the right thing and helps steady gilt yields.”
Wonkish economists from the likes of the Institute for Fiscal Studies have urged Reeves to go big, increasing the “headroom” she has against her borrowing rules to reduce the risk of having to come back with further tax rises next year. They say that it would be better to break her manifesto pledges, for example, by putting 1p or 2p on income tax, or even to announce future changes to the enormously popular triple lock on state pensions, which guarantees pensioners’ incomes will go up in real terms over time and outstrip average earnings.
‘A lot rests on Rachel’
But a Treasury source said the Government had learnt the hard lessons from mistakes made over trying to scrap the universal winter fuel allowance for pensioners, only to have to U-turn months later. “We didn’t win that argument with the public and with the media,” and there are “lessons to be taken from the episode,” the source said. One of those lessons is that the Government will not try to change its commitment to the triple lock in this parliament, they added.
‘Detested’ PM could face a coup by Christmas
Labour insiders have described the Budget as “make or break”, not only for Reeves but for Sir Keir Starmer, who has had his leadership openly debated in recent weeks. One of the party’s MPs said it could go down in history as a major turning point – either for the worse, like the Liz Truss “mini Budget” of 2022, or for the better, as when Margaret Thatcher announced brutal tax hikes in 1981, which laid the ground for a long-term recovery.
One MP said: “It will depend on whether they can tell a clear, authentic story about why they’ve taken the decisions they have and how the package lifts growth and living standards – and quickly. It’s a big ask – and a lot now rests on Rachel finding that story.”
A colleague put things even more starkly, telling The i Paper: “It would not surprise me in the slightest if a move is made against Starmer by Christmas, if the Budget doesn’t land perfectly.” This MP added: “[Andy] Burnham loosened the ketchup bottle with his leadership posturing over conference, and now people are openly talking about who should take us into the next election. There is a fear that Starmer is doing generational damage to the Labour Party. People detest him – I don’t think it’s fair, but he is hated.”
Labour so unpopular that new fall in polls is unlikely
Chris Hopkins, of polling firm Savanta, warned that even a well-delivered Budget would be unlikely to rescue Labour’s fortunes in the near term; but with the cold comfort that the party is already so unpopular, it is unlikely to lead to another decline in the polls.
He said: “Winter fuel was the beginning of the turning point – they have really struggled to wrestle back any credibility since then. The polling picture is so in the doldrums for them, it couldn’t really get worse. There isn’t really much further down to go.”
A good Budget “can help to reframe a narrative” over the longer run, Hopkins added, but warned: “There is a feeling maybe that the Labour Party and the current Government has undone all of the goodwill and it is going to take a lot to win that back.”
Given the rise of Reform UK, some in Westminster argue that the economy is no longer the number one issue for voters. That, instead, is immigration. But Hopkins said that in time, the cost of living would reassert itself as the public’s underlying priority.
He concluded: “I think the public would maybe make more allowance for immigration if they felt more economically secure. In that sense, I think the economy still wins out as the top issue in terms of who is going to win the election.” For Labour, the stakes could not be higher.
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