Budget Concerns Ahead: Tax Rises Loom
Warnings of a “painful” Budget often signal hefty tax increases. Chancellor Rachel Reeves has stated she needs to find £22 billion to address a « black hole » in the public purse. Despite this challenge, she is also pledging to end austerity and invest in essential areas like hospitals and roads to stimulate growth.
Balancing Act: Avoiding Big Tax Hikes
The pressing question remains: how can she achieve both objectives without substantial tax hikes? Reeves is expected to implement a strategy centered around the government’s self-imposed borrowing limits. While this approach may not eliminate tax increases, it could help mitigate their scale.
Importance of Borrowing Rules
In the UK, the government adheres to a fiscal rule requiring debt to decline within five years. This rule is crucial for maintaining credibility with financial markets and taxpayers. Notably, the UK has run a deficit in nine out of ten years. Consequently, the credibility of these rules directly impacts borrowing costs, as demonstrated during Liz Truss’s 2022 mini-Budget, which led to soaring costs due to a lack of credible plans.
Reeves’ Strategic Changes
To navigate this fiscal landscape, the chancellor sets her own fiscal rules; however, the independent Office for Budget Responsibility (OBR) evaluates their impact. Ahead of the general election, Reeves aims to follow the framework established by her predecessor, Jeremy Hunt. Importantly, she may redefine debt to ease financial pressures. One option involves reclassifying the Bank of England’s pandemic-related losses, potentially allowing her to report a more favorable debt trajectory and freeing up £16 billion for spending.
Alternative Financial Measures
In addition, Reeves could broaden the definition of public sector net financial liabilities, which might add £50 billion to available funds. Alternatively, incorporating estimates of public infrastructure value could provide even more flexibility. However, these measures can be complex and may invite skepticism.
Managing Borrowing Costs
Despite concerns over rising borrowing costs, analysts believe that interest increases will be limited due to strong investor demand. To maintain credibility, Reeves has emphasized a prudent approach, stating she is not in a “race to get money out the door.” Most additional funds will likely be allocated to investment in infrastructure rather than immediate spending.
Long-Term Investment Strategy
Furthermore, Reeves has committed to a critical rule: the government will fund all day-to-day spending through tax receipts. Sustainable investment is vital for future growth and should help restore investment spending, which is projected to decline relative to the economy’s size.
Upcoming Budget Challenges
As it stands, public services face squeezed budgets for day-to-day spending. Fulfilling government priorities could still require tax increases of up to £25 billion, according to estimates from the Institute for Fiscal Studies. While the Labour government aims to raise £9 billion from its manifesto measures, further details are still needed.
Conclusion: Anticipating the Budget
Ultimately, even with budgetary adjustments, there will be both winners and losers. The final decisions regarding tax rises and spending priorities will be revealed on 30 October.
