Fiscal deliberation: Commuters walk across London Bridge in central London. The November UK budget is set to be a defining moment for the government. — AFP
LONDON: Chancellor of the Exchequer Rachel Reeves needs to raise her fiscal buffer fivefold to have a better-than-even chance of avoiding more tax rises and spending cuts in the coming years, according to the Institute for Fiscal Studies (IFS).
Reeves may need to find as much as £22bil (US$29.4bil) at the budget next month just to restore the razor-thin £9.9bil margin she had in March, the influential think tank said in an report.
Restoring that headroom – decimated by higher borrowing costs, U-turns over welfare cuts and a predicted productivity downgrade – would still only give Reeves a one-in-three chance of meeting her pledge to balance day-to-day spending and revenue by the end of the decade.
A margin of 1.4% of gross domestic product (GDP), almost £50bil, would be needed to put the odds above 50-50, the IFS said.
Anything less than that leaves the government more exposed to “fiscal groundhog day” scenarios, the IFS said in its Green Budget.
The analysis underlines the scale of the challenge facing Reeves as she prepares for what’s expected to be a difficult budget on Nov 26. Businesses and consumers are braced for further pain despite Reeves vowing that £40bil of tax rises in her first budget a year ago would be the last.
“Whilst 1.4% of GDP is not an inconceivable amount of headroom...it would require significant spending cuts or tax rises to reach it from the starting point of the last few years,” the IFS said.
“On the tax side, it would take a four percentage point increase in all rates of income tax or in the main rate of VAT to get to this level of headroom from the level achieved at the last two fiscal events.”
Reeves found herself awry of her rules months after announcing huge tax rises on businesses last year, and is once again under pressure to plug a fresh hole in the public finances.
Her current margin is so thin that even small moves in government bond markets can upend the Office for Budget Responsibility’s (OBR) projections.
“There is a strong case for the chancellor to build more headroom against her fiscal rules. That wouldn’t be costless – but nor is limping from one forecast to the next under constant speculation that policy will be tightened again,” said IFS director Helen Miller.
A Bloomberg News report earlier this month revealed that Reeves is drawing up plans for tax rises and spending cuts to boost her headroom at the budget.
The IFS analysis adds to calls from Oxford Economics and Bloomberg Economics for a larger fiscal buffer that would bring down the government’s borrowing costs and shield public finances from future shocks.
The November budget is set to be a defining moment for the government. Prime Minister Keir Starmer’s Labour Party is struggling to recover from a sharp decline in opinion polls since its landslide victory 15 months ago.
It’s one of its last chances to win back voters before local elections in May where Nigel Farage’s anti-immigration Reform UK party is predicted to make large gains.
Reeves’ current buffer – the third smallest since 2010 – has driven frequent speculation about tax and spending that has hurt business investment and consumer spending. Reeves has called for just one set of OBR forecasts a year, rather than two, and a single fiscal event to introduce more stability to policymaking. — Bloomberg
