Rachel Reeves is lost in space
Rachel Reeves said was steering the economy past a black hole but her calculations are off and we’re heading for the abyss, says Helen Thomas
One year ago, the new UK Chancellor declared that upon taking office she had discovered a £22bn fiscal black hole. She told parliament in her first big speech, “If left unaddressed it would have meant a 25 per cent increase in the government’s financing needs this year, pushing gilt issuance further into record highs outside of the pandemic”. Addressing it was done by an immediate decision to restrict winter fuel payments to offset public sector pay rises to train drivers and doctors. This was followed up in the Autumn Budget with higher taxes. Still the black hole lurked, its gravitational pull undisturbed by Spring Statement attempts to rein-in welfare spending. Even that was thwarted by rebellious backbenchers, leaving the economy even closer to the event horizon than before Rachel Reeves spotted the issue that required addressing. In space, no-one can hear you scream but they can still see your tears.
It wasn’t supposed to be like this. Reeves was the prudent astronaut, eyes on the dials, fully trained on the technical details. She wanted you to know that she had done her homework. She explicitly referred to the latest economic data in that first big fateful speech. She warned “We have already seen official ONS figures this month showing borrowing is higher this year than the OBR expected”. Such a dire situation led her to intone solemnly: “Not to act is simply not an option”.
But the action she has taken has only made matters worse. The latest borrowing figures once again overshot, with the public sector net borrowing at £20bn vs £16bn expected. This was the highest ever number for June, aside from during the pandemic. We are at national emergency levels of borrowing, even though the Covid era is behind us. The current budget is in deficit by £44.5bn in the first three months of the financial year, £5bn more than the OBR had forecast. This measure is tied to one of Reeves fiscal rules, that ‘the current budget should be on course to be in balance or surplus by 2029/30’. The OBR had already ruled that prior to the changes announced at the Spring Statement, this rule wouldn’t be met “pre-measures”:
These all-important measures to meet the fiscal rules were then unable to be passed by the government following the rebellion over changes to disability benefits. Reeves’ crewmates on board HMSS (His Majesty’s Space Ship) The Endurance are certainly not making it any easier to avoid the black hole. Neither are voters. With Labour having struggled at the local elections and plunging in the polls, the Prime Minister announced a U-turn on the winter fuel payment restrictions. Adding this to the welfare rebellion has increased Reeves’ black hole by at least another £6bn.
Addressing the problem has made it worse
Addressing the problem appears to have aggravated the problem. Increasing employer national insurance contributions did increase government tax receipts but has also weighed on the jobs market. Bank of England Governor Andrew Bailey told The Times that companies were “adjusting employment and hours and also having pay rises that are possibly less than they would have been if the NICs change hadn’t happened”.
Like most interstellar space travel, tiny errors in the calculations can throw the entire flight path wildly off track. Reeves has consistently left herself with little room for manoeuvre. She has tried to optimise for both fiscal and political constraints: spend enough to please her party, tax enough to meet her rules. But economies are imprecise by their nature. Billions are rounding errors when debt-to-GDP is almost 100 per cent.
Trying to satisfy the OBR’s impressively complex model of the economy leaves her vulnerable to every data point, every increase in Gilt yields, every tariff shock. The obsession with the OBR came from the market’s defenestration of Liz Truss. But Reeves has truncated that episode into the simple heuristic that pleasing the OBR means keeping your job. Except the OBR’s forecast is prey to revision and markets are not solely controlled by two fiscal reports each year. Every time a new piece of information demonstrates that the problem being addressed has become even more of a problem, Gilt yields rise to reflect the higher risk premium. And the higher yields exacerbate the black hole.
Voters must feel as if we are marooned on Miller’s planet, where every hour that passes is equivalent to seven years on Earth. The wait for growth is interminable. But governments are not aeronautical engineers. The fiscal rules are not as immutable as the laws of physics. Sell the plan to markets and voters and you will find the capacity to slingshot the economic orbit back into growth.
Helen Thomas is CEO and founder of Blonde Money