Eleven more weeks. Eleven more bloody weeks. Apologies for the language. But it’s a pretty accurate summary of market opinion after the chancellor’s announcement that the forthcoming budget will be delayed all the way until November 26.
The timing by Rachel Reeves is the product of a cunning political strategy, frequently adopted by the previous government, known as “hoping something will turn up”. In particular, hoping that global bond yields fall enough to ease the intense pressure on government borrowing costs — and by extension limit the scale of the tax rises that we all know are coming.
The obvious danger, however, is not only that the markets don’t comply but that we get a repeat of last summer, when rampant uncertainty about precisely which taxes were going up, plus endless kite-flying in the papers about particularly gruesome proposals, led to businesses putting all kinds of hiring and investment decisions on hold and consumers keeping their wallets in their pockets. Indeed, Reeves’s budget will come eight full months after Keir Starmer first set the hares running by refusing to rule out tax rises in the autumn.
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To restate the bleeding obvious, it wasn’t meant to be like this. Labour told us before the election that it could pay for all its plans. Then it told us that the tax rises last year were one and done. Now it’s saying it needs more. Turns out it’s pretty tricky to put spending up without paying for it. Who knew?
It was obvious before the election to anyone who could read a spreadsheet that Labour would have to put up taxes. But the party made things worse for itself not just by denying the fact, but by specifically promising that it would not raise any of the four biggest taxes: income tax, national insurance, corporation tax and VAT. Reeves pushed the limits of this promise by retaining the Tories’ freeze on income tax thresholds (a tax rise on workers by any other name) and increasing the employer’s component of national insurance (likewise). But now she’s largely snookered.
The result, even more than last year, is that Labour is left trying to get large sums from small taxes. But the effect of that is to concentrate the pain in ways that people really notice, and object to. Treasury ministers can complain that all the mad briefings about wealth taxes, or taxing the sale of the family home, or VAT on puppies or whatever, aren’t coming from them. But that raises the obvious rejoinder: so what are you thinking of taxing, then?
Looming over all this, of course, is the threat of the bond market. Ministers are right to say that the sharp increases in gilt yields, which dictate how much it costs to cover the interest on our truly mountainous volume of borrowing, are not their fault: rates have been rising everywhere. But they’re not not their fault, either. Ever since the mini-budget, lenders have been charging Britain more than similar countries have to pay. That sentiment has been entrenched by a sense in the markets that we aren’t serious about spending restraint (look at the fiasco over the welfare reforms), controlling inflation (public sector pay rises) or generally getting our house in order.
Indeed, analysts have been highlighting the extent to which our inflation problem derives from government decisions: energy bills inflated by Ed Miliband’s net zero policies, or the hikes in employer’s wage costs inevitably being passed on to workers. And then there’s the Bank of England’s bizarre insistence on selling hundreds of billions of bonds created as part of its quantitative easing programme into a buyer’s market.
The upshot — as Rupert Harrison, a former Tory adviser now working at the bond giant Pimco, wrote the other day — is that “investors now treat the UK as guilty until proven innocent”.
So where does it all end? Some of the more excitable figures on the right are predicting a full-on bond strike — debt servicing costs for the UK climb so high that we can’t make the numbers add up, the IMF swoops in and it’s Healey and Callaghan all over again.
That still seems unlikely. More likely is that the gilt market remains a constant, bleeding wound, putting pressure on the public finances, which leads to tax rises and speculation about tax rises, which leads to lower growth, which leads to pressure on the public finances and so on and so on (at least until someone, somewhere, makes the radical case to the British public that we can’t actually afford to keep spending money we don’t have).
On tax, similarly, the most obvious and least economically damaging solution — given Labour’s allergy to cutting spending — would be for Reeves and Starmer to bite the bullet and break their pledge: to accept that if you want (or need) big money, you have to raise one of the big taxes.
This is certainly what many in the markets want: for the government to give itself enough headroom that it doesn’t keep bumping up against the limits of its fiscal rules and we don’t have to do this all again next year, and the year after that. But that would also represent a fundamental breach of faith with the electorate — and mean tearing whole pages out of Labour’s manifesto.
In his big speech to Reform’s party conference last week Nigel Farage didn’t say much about the economy. Apart from one passing reference to the bond markets, he left the money stuff to that unlikely financial sage Nadine Dorries, who joined him on stage as the party’s latest star defector.
But for all Reform’s focus on migration — indeed, for all the wider farragos and fiascos that have assailed this government, Angela Rayner’s failure to get decent tax advice very much included — it is issues of the economy and cost of living upon which governments live and die. That is why, amid the extraordinary game of musical chairs played over the past week, both within No 10 and around the cabinet table, it is the woman who didn’t move who remains by far the most important to Starmer’s future.
The economy may be able to cling on until the budget. But if Reeves can’t square the circle on the public finances, things for this government — and for the country — will get even worse. No wonder Nigel is smiling quite so broadly.