The recent fiscal strategy outlined by Shadow Chancellor Rachel Reeves has resonated throughout financial markets and her own political party, leading to significant implications for the UK’s economic future. For the past year, the government has been plagued by instability and a lack of credibility. This political turmoil resulted in a historic rollback of the 1990s welfare cuts over one hot summer. And the economy has been further hampered by downgraded long-term productivity forecasts. To make the country’s economic landscape more amenable to business, Reeves wants to raise taxes, creating an unusual juxtaposition.
Make no mistake, Reeves’ message is a stout kick to the throat. So far it’s the most impressive, real shift in fiscal policy after years of uncertainty. As we look ahead, the economic forecast has turned decidedly gloomy, with expectations for much slower growth going forward. Beginning on the economic front, things are looking a lot stronger than anticipated. This advancement is the result of strong performance and positive performance based upgrades earlier this year. That early market strength has provided a cushion against some of the market turbulence that has defined recent months.
1 example, Reeves has opted to focus on a more transparent, annual review of fiscal rules. This new strategy, introduced in 2021, seeks to rescind the Cleveland agreement’s historic bi-annual inspections. This decision showcases her judgment as to what demands a more uniform application during rollercoaster market ups and downs. Reeves is taking an innovative, principles-based approach to increasing confidence in America’s financial markets. Yet at the same time, he is meeting the moment’s urgent call for fiscal responsibility.
In order to produce additional fiscal space, Reeves has made a giant tax hike his priority. His aim is to at least double this headroom around borrowing targets, increasing it to £22 billion a year. Overall, this decision increases the government’s flexibility to more efficiently manage its borrowing. It further supports them to answer the challenge of living up to the expectations of the market. Reeves wants to double down on this aggressive taxation. Through this strategy, she can refocus the spotlight away from financial markets, allowing her administration to take a longer-term, more strategic view of public spending.
Longer-term, the government has committed to introducing a new year-long Spending Review whereby borrowing more will be accepted to fund political goals. This will be accompanied by a pledge to reduce overall borrowing in the back half of the decade. To do this, we’ll raise taxes. The major part of this plan is to continue freezing tax thresholds for another three years 2028-31. This never-adjusted freeze is automatically set to throw low- and middle-income people into higher tax brackets. It is estimated that close to a quarter of all people will be caught by this higher rate tax.
The stakes of these changes could not be higher, as the tax increases are on track to raise $8 billion in 2028 at the earliest. The government is counting on delivering an economic growth rate above 1.5% to fund its fiscal plans. This conservative projection illustrates the difficult juggling act ahead for Reeves and her administration. They need to balance their desire for more tax revenue with the citizens’ demands for jobs and economic development.