Rachel Reeves will unveil her make-or-break autumn budget on Wednesday, after months of speculation over tax rises.
In a critical speech in the Commons, with the government under intense pressure, the chancellor is expected to announce tax and spending measures aimed at plugging a multibillion-pound shortfall in the public finances.
Reeves, who is facing the scrutiny of jittery backbench MPs and bond investors, has said her priorities are cutting NHS waiting lists, the national debt and the cost of living. Here are five charts that will underpin her decisions.
Headroom
Reeves has committed to operate within an “ironclad” fiscal rule, a self-imposed target requiring day-to-day spending to be matched by receipts in the fifth year of the forecast from the Office for Budget Responsibility (OBR).
In the spring, Reeves left £9.9bn in reserve as a buffer. But this is expected to have been more than erased by higher borrowing costs, welfare U-turns and an anticipated sharp OBR productivity downgrade.
The exact size of the shortfall will be a key moment of the budget. Most economists expect a gap of up to £20bn. The Institute for Fiscal Studies (IFS) predicts a £12bn deficit. This would requires Reeves to raise £22bn just to get back to her spring headroom position.
However, the chancellor is expected to go further. Leaving £9.9bn again would rekindle speculation over the narrow margin of error, which has damaged confidence in the economy. City investors expect a fresh buffer in the region of £15bn to £20bn.
Productivity
A big contributor to Reeves’s fiscal gap is expected to be a dramatically weaker productivity forecast. A critical measure of output per hour of work, productivity is a vital driver of economic growth, wages and living standards.
For years the OBR has overestimated that growth could return to near the 2.2% annual average from before the 2008 financial crisis. This spring it predicted a rate of about 1.25% by 2029-30 – significantly above other forecasters.
Each 0.1-percentage-point downgrade to productivity would increase public borrowing by £7bn in 2029-30. Reeves is understood to be furious about the timing of the assessment from the independent Treasury watchdog.
It comes amid a broader slowdown in the economy. While the UK was the fastest-growing G7 country in the first half of the year, growth remains lacklustre. Household and business confidence is subdued amid the effects of tax rises, elevated borrowing costs, sticky inflation and Donald Trump’s trade wars.
Borrowing costs
How the bond market reacts will be key for Reeves. For weeks the chancellor has sought to roll the pitch to soothe jittery City investors to avoid a repeat of the turmoil after Liz Truss’s 2022 mini-budget.
The yield – in effect, the interest rate – on 10-year UK government bonds has fallen in recent months, but remains elevated at about 4.5% – the highest level in the G7. The 30-year is close to its highest point since 1998.
Borrowing costs have increased across rich countries, amid sticky inflation and weaker growth. Investors are also fretting over the UK’s fiscal position, with the national debt at close to 100% of GDP.
Earlier this month, investors took fright after reports that Reeves had ditched a plan for a manifesto-busting income tax increase.
With the UK’s annual debt interest costs running at £100bn – representing £1 out of every £10 spent by the Treasury – the chancellor will be hoping to coax yields down to help cut this bill.
Tax rises
Labour promised before last year’s election not to increase taxes on “working people”, including through income tax, national insurance contributions (NICs) and VAT, alongside a pledge not to raise the rate of corporation tax.
This has left Reeves to target alternative measures for raising money. Most economists predict she will opt for a smorgasbord of tax rises and spending cuts as a result.
Avoiding a manifesto breach could help to keep restive Labour MPs on side. But economists warn that a string of smaller measures could be hard to implement, with each carrying the potential for a “pasty tax”-style backlash – a reference to how the former Conservative chancellor George Osborne’s 2012 budget unravelled within weeks over measures including VAT on hot pastries.
Labour’s critics will point to OBR forecasts showing that tax as a share of GDP is at its highest level since the second world war. However, Reeves could highlight that higher spending is required to mend public services and to support an ageing population.
Cost of living
Reeves has vowed to cut living costs in her budget. Measures to bring down the headline inflation rate are expected to feature prominently, to ease pressure on households and also to encourage the Bank of England to cut interest rates.
Households have come under particular pressure from fast-rising food prices. Businesses have warned that tax increases in Reeves’s first budget forced them to put up prices.
Threadneedle Street has cut borrowing costs five times since Labour’s election landslide, with the last reduction in August to 4%. Financial markets are predicting another cut at the monetary policy committee’s next meeting on 18 December.
The Bank expects that inflation has probably peaked. However, at 3.6%, it remains significantly above the 2% target set by the government, and is running at the highest level in the G7.
