UK Chancellor of the Exchequer Rachel Reeves recently made headlines with a surprise £70 billion anti-austerity boost to public spending. This ambitious plan would make lasting improvements for the public requiring big investments in public services and all major departmental budgets. It will be paid for by increased borrowing and £40 billion of tax rises. Reeves initially tries to pass off these tax increases as a one-time fix. Economists are concerned that another round of tax increases may be just around the corner.
In her address to lawmakers, Reeves emphasized her commitment to improving public services without relying heavily on borrowing. “We’re not going to be coming back with more tax increases, or indeed more borrowing,” she stated, aiming to reassure the public and her peers that fiscal responsibility remains a priority. Reeves’ approach is one that strikes a careful balance between focused short-term needs and long-term financial sustainability.
The Chancellor’s fiscal strategy is underpinned by a “fiscal rule” that mandates day-to-day government spending be financed through tax receipts rather than additional borrowing. This accountability pillar addresses the long-term fiscal position of our country. It brings budget discipline at a time when the government started big new spending programs. At the moment, the Treasury only has an estimated £9.9 billion of limited fiscal “headroom.” This funding is essential to address Reeves’ top fiscal priorities come this spring.
Reeves’ announcement follows measures by her government to start unwinding other deeply unpopular spending cuts which were already in their early implementation. Especially striking is the temporary reversal of the winters fuel allowances paid to pensioners—a cut that produced such public outrage that it was restored. This recent change demonstrates a growing realization of both the political winds and public mood regarding fiscal policy.
The recent economic data paints a thorny landscape for Reeves’ spending proposals. Preliminary monthly gross domestic product (GDP) numbers indicated that the UK economy contracted by 0.3% in April. This decline contributed to growing fears that we had run out of paths to sustainable economic growth. In addition, economists are already warning that Reeves will be short £4 billion as a result of several economic headwinds.
Despite her insistence on limiting further tax increases, financial analysts suggest that such measures may become unavoidable later this year. They cite loud and clear concerns about their ability to raise new revenues in this inflationary, recessionary time. Options being considered include extending the freeze on income tax allowances and thresholds for an additional two years until 2030.
In the meantime, Reeves is looking at other possible approaches. One plan is to limit tax relief on pensions for top earners, another would impose a £3 billion levy on the gambling sector. Even more radical has been the proposal for a wholesale devolution of council tax – another way of raising more money.
Third, Reeves’ proposals for strengthening public services largely focus on routine funding increases, such as for health and defense sectors. Those sectors will get billion-pound boosts focused on building their readiness to deploy and meet the urgent needs of the community. Whether you’re looking to improve infrastructure or equity, health is on everyone’s lips these days. Thousands of us are campaigning for fairer access to healthcare and more help for NHS workers.
Reeves perseverance into the difficult financial waters of 2020. That’s not enough, economists are continuing to push her warning her that her proposed tax increases won’t cover the expected shortfalls and economic challenges coming down the pike. The maze of interactions between public spending, tax policy, and economic performance makes it a confusing landscape for policy makers to navigate.