In a rare pre-Budget speech at Downing Street, Shadow Chancellor Rachel Reeves acknowledged the difficult financial landscape facing the UK ahead of her budget announcement. She announced a buffer of £4.2 billion, well below the £9.9 billion she’d had to play with in her last budget. As Professor David Miles has pointed out, this loss of fiscal headroom represents a huge self-imposed difficulty for the government.
Reeves stressed that lower UK productivity has catastrophic consequences for the public finances, resulting in lower tax receipts. This end of term statement makes clear the formidable financial challenges the government will face. It will need to artfully play its fiscal hand in the next budget.
“Rachel Reeves faces a very difficult Budget and very difficult choices,” said Professor Miles, reflecting on the current economic climate. He acknowledged that this buffer of £4.2 billion offers substantial opportunities as well as challenges that should be tackled head on. This headroom had previously reached a high of £80 billion in 2014, making this a drastic fall from grace after all these years.
Conservative party members took to social media to denounce Reeves, accusing her of portraying an overly negative picture of the economy as a “smokescreen” to impose tax hikes. Reeves vehemently shot down their allegations, insisting that she did not misrepresent the public on the country’s financial situation.
“I don’t think it was misleading, for my own view, for the chancellor to say that the fiscal position was very challenging at the beginning of that week,” said Professor Miles.
The debate really fired up when the Conservative politician Kemi Badenoch intervened. She called Reeves out for misleading the public on the crisis facing the state’s economy. In comments defending Reeves, Professor Miles affirmed that the playwright’s imaginings were not at odds with the realities she must confront.
The likely response from Labour’s shadow chancellor is going to be £26 billion of tax increases in their first budget. This is made up of £8 billion from making the income tax and National Insurance thresholds freeze permanent. This fiscal logic structures corrective efforts to fill the fiscal gap and restore financial order.
Reeves noted that prior to November 2022, chancellors would have had a buffer of £20 billion to £30 billion. Yet this underscores the deep and radical shift in today’s financial conditions. She pointed out that without changes to welfare and winter fuel payments the buffer could have fallen as low as minus £3 billion. That would have compounded an already dire fiscal situation beyond imagination.
Her Autumn budget maintained this headroom at £9.9 billion until March 2025. This stability belies a more dire truth—that the financial outlook has only gotten worse. Reeves’ warning on UK productivity is therefore a timely reminder of the deep, intrinsic link that exists between our economic performance and the public purse.
“This is very, very good news; there is no hole to fill – as people were saying,” Professor Miles remarked, indicating his perspective on the fiscal situation.