Rachel Reeves should put us all out of our misery this Wednesday with a tax-and-spend statement bold enough to make future budgets boring again.
Ask any economist or policy wonk and they’ll tell you the buildup to this year’s budget has been among the most drawn-out and chaotic they can remember.
Treasury insiders are adamant they have maintained the same “Labour values” throughout and that Reeves first scribbled down her top three priorities – the NHS, the cost of living and the public debt – as long ago as July.
But the combination of volatile bond markets, pass-or-fail fiscal rules, and Reeves’s decision to leave herself with less than £10bn of headroom against them, has led to months of uncertainty and indecision.
It is not meant to be like this: aside from the agenda-setting first budget that follows a general election victory, and outside economic crises (though goodness knows we have had plenty), budgets should be reassuringly dull.
Chancellors whose principles are clearly understood by the public and the markets ideally keep a steady hand on the tiller of tax-and-spend policy.
A memorable budget tends to be a bad budget: Gordon Brown’s too-clever-by-half abolition of the 10p starting rate of income tax in 2008; George Osborne’s “omnishambles” in 2012; Anthony Barber’s “dash for growth” in 1971, subsequently blamed for uncorking an unsustainable boom.
Reeves had not intended to be an exciting chancellor. Indeed, she and Keir Starmer hoped that by being the cautious and sensible successors to the five-leaders-in a-decade Tories, they would reap economic benefits.
Investors glad to see the back of Conservative chaos would return to the UK; a more stable relationship with the EU would help to reduce trade barriers; growth would follow.
But the hoped-for stability has not materialised. Part of the explanation is the shaky global backdrop. But the problem also lies in the miasma of gloom and uncertainty that has surrounded an administration often unable to give a clear account of itself, even to its own MPs.
Reeves needs to do at least three things on Wednesday to cut through the fog and buy herself the time and space to deliver another, much less exciting budget in a year’s time.
First, she should be brave enough to increase her headroom significantly. Markets appear to be expecting a doubling, to £20bn.
There are trade-offs here, as the chancellor has repeatedly made clear. Stonking tax rises threaten economic growth, which is already anaemic. But she needs to give herself enough room for manoeuvre to avoid every spit and cough of economic data fuelling a market reappraisal of whether she can meet her rules.
Executed with force and clarity, this approach could pay dividends in lower government borrowing costs. It should also make space for the Bank of England to deliver much-needed rate cuts.
Second, Reeves seems to be minded to downgrade the status of the OBR’s spring forecast, so that its chair, Richard Hughes, and his number crunchers will opine on the state of the economy but not mark her against her fiscal targets.
This change, recommended by the International Monetary Fund, seems sensible: the UK is an outlier in having what have in effect become two big fiscal events a year.
It was the evaporation of Reeves’s headroom in the OBR’s March forecast that prompted the botched welfare changes in the spring. The less drama is provoked by the OBR’s next set of forecasts, the better.
Third, and perhaps most challengingly, Reeves needs to set a clear and compelling direction of travel. How is it that Labour intends to “change” the UK, as its manifesto pledged? And how can the costs of that transformation be met fairly?
The “one and done” framing of last year’s budget, with Reeves telling the CBI she would not have to come back for more after raising taxes by a historic £40bn, left few clues as to how she would handle this year’s main roadblock, of the OBR revisiting its productivity forecasts (something Labour wonks always knew was a possibility, incidentally).
When Labour came to power, she didn’t kick off a review into how to tax wealth better, or to reform the crazily regressive council tax, or to look again at the pensions triple lock – offering clues to her principles.
Instead, the straitjacket of the manifesto tax promises resulted in the £25bn employer national insurance contributions increase that many observers, including at the Bank of England, believe has put the brakes on hiring and boosted inflation.
Some of her clearest language in last year’s budget was reserved for the idea of freezing income tax thresholds, which would, she said, “hurt working people”. She is now expected to do exactly that on Wednesday.
Raising income tax, in clear contravention of the manifesto promises, was an alternative way through this week’s budget, as part of a “go big” package that would have jacked up Reeves’s headroom significantly.
The argument, tested by the chancellor in her “scene setter speech”, would have been that “if we are to build the future of Britain together, we will all have to contribute to that effort”.
If, as expected, she has reverted to a pick’n’mix of tax changes, she will need a different argument to tie them together. They may well, in fact, all be progressive – hitting higher earners and the wealthy harder – but she will need to say that loud and clear to make the budget feel coherent.
Everyone – from the bond vigilantes who could sink the budget, to fed-up voters at home – would benefit from a much clearer sense of this Labour chancellor’s principles and purpose. That would make next year’s budget reassuringly boring – if she is still around to deliver it.
