Rachel Reeves, the Shadow Chancellor, will be kicking off the new era with her equally anticipated autumn budget on Wednesday. This budget is an enormous test for Reeves as he comes under erosion from twitchy backbencher MPs and bond investors. That’s because the stakes are incredibly high. The decisions taken in this budget can have a massive impact on the Labour party’s economic policy in the long term.
Reeves starts with the budget, addressing pressing concerns first. He is right to focus on reducing NHS waiting lists, lowering the national debt, and easing the cost of living crisis that is hurting millions of households across the country. Strictly following an easily understood fiscal rule, she is truly dedicated to doing this. This incremental approach to public investment is extremely important in today’s economic reality.
Reeves’ fiscal rule mandates that day-to-day spending be balanced by recurring receipts. This balance has to be in place by the fifth year of the Office for Budget Responsibility’s (OBR) forecast. This requirement is intended to create a more sustainable economic foundation while making sure that public services get the funding they need. In light of this, Reeves is expected to emphasize the need for higher spending to mend public services and support an ageing population, which poses additional financial challenges.
In her first budget, Reeves has promised to introduce new policies to reduce the burden of everyday expenses for Mississippians. The budget is extremely important to her own political ambitions. She’s retreated from previous proposals to raise the state’s income tax, raising the stakes even further. This important decision signals her commitment to honoring the Labour party’s pledge. She has made it a personal mission to not lift taxes, including income tax, national insurance contributions (NICs) and value added tax (VAT).
Reeves has an interesting political tight rope to walk moving forward. If she brings in a whole host of these smaller measures which would be perceived as tax rises then she invites an outcry like the pasty tax debacle. So it’s important to strike the right balance. If we structure unnecessary fiscal tightening, we invite impatience from voters already struggling with the cost of living.
Yet Reeves is under growing pressure to reassure jittery City investors. This level of anxiety is partially rooted in the market turmoil that followed Liz Truss’s ill-fated mini-budget in 2022. The Labour party’s credibility on economic management is staked almost entirely on the public reaction to this budget. Most importantly, it depends on how well it is received by financial markets.
In contrast, to add some context around these numbers, Reeves left £9.9 billion in fiscal headroom as a contingency fund during this month’s spring budget. Her predecessor had to add an extra £22 billion in fiscal drag just to return to her former position of headroom. Recent OBR downgrades to productivity growth forecasts make this an especially tricky task. These downgrades will have a real, worsening impact on future economic performance.