Rachel Reeves, the Chancellor of the Exchequer, is under increasing pressure to formulate a bold Budget as she prepares to raise taxes. The Institute for Fiscal Studies (IFS), an influential think tank, has highlighted that Labour previously committed to not increasing National Insurance, the basic, higher, or additional rates of Income Tax, or VAT. Reeves is staring down a challenging fiscal picture. She needs to juggle her time and energy, maximizing her return on investment as she seeks to pay her bills and support herself.
Reeves has set out two golden fiscal rules that she will try to stick to by the close of this parliament. The first is that she won’t borrow to fund everyday public spending. The second of these rules is that government debt has to be declining as a share of national income. She needs to focus on a large deficit, the IFS stresses. If she hopes to live up to these fiscal pledges, now is the time for action.
And the IFS have already urged Reeves to be bolder still in her next – and really, her first proper – Budget. They sound the alarm about the immediate need for painful, unprecedented choices. Failure to address the shortfall could lead to future spending cuts or tax increases, which could impact public services and economic growth. The nonpartisan think tank points to a number of reasons contributing to the government’s narrow fiscal circumstance. Higher borrowing costs, less optimistic growth projections, new spending pledges since the spring all help push this figure sky-high.
This is perhaps happening now, as the government has so far baked £10 billion of headroom into its fiscal recipe. The IFS makes a firm case for going beyond this headroom and raising the ceiling above £10 billion. They argue that improving fiscal flexibility would better enable the states to make targeted investments that increase access to opportunity and spur greater economic growth.
Amidst this financial debate, Ms. Miller has voiced concerns regarding the “constant obsession with the headroom,” suggesting it detracts from more crucial discussions on policy reform and how to effectively bolster economic growth. She calls for putting people and transformative policies at the center of policies, not just fiscal balancing acts.
With the Budget looming, Reeves is in a challenging position. She needs to balance her fiscal obligations with the urgent call to re-energize our economy and go by her self-imposed guidelines. Her decisions will set the direction of travel for the UK’s economic landscape for years to come. They will shape public finances in the years to come as well.