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heyOne of the many regrettable features of This is the conduct of the government’s economic policy. There appears to be some discrepancy both between and within Number 10 and the Treasury.
As the experience of previous administrations shows, if such differences are not resolved in a politically and economically coherent manner, trouble usually ensues. The increased economic clout in the Prime Minister’s Office drafted into the previous reshuffle – when Chief Secretary to the Treasury Darren Jones was moved to a new senior role in Downing Street – was supposed to provide a clear focus on the economic “narrative”, but so far there is little evidence of this, and this may only have complicated matters.
So, all the more reason for the Budget to offer some much-needed clarity for the whole of government in less than a month.
The discrepancy appears to be wider than ever. Office for Budget Responsibility (OBR) data, reported by the BBC, certainly confirms the scale of the challenge Chancellor Rachel Reeves is facing off.
Ms Reeves already knew she faced a gap in finances of between £30bn and £40bn. But it has been dealt a further blow by the OBR’s decision to slash its productivity forecast – meaning it will have to cough up an extra £20bn.
As vague as it may be, this OBR decision is bigger than it sounds. A decline of 0.3 percentage points on an already weak projection is substantial, and points to a decline in overall economic growth in the coming years. He, in turn, This means that tax revenue will be less and public expenditure will be more.Compared to previous estimates, there would be clearly severe impacts on Britain’s strained public finances. This makes the second, Additional “black holes” in Ms. Reeves’ plans.Which will have to be covered either by tax increases or by cutting state spending, as she has already indicated.
Yet to some extent, at least, it can be read as spin. Since George Osborne established the independent OBR in 2010, the budget process has been an iterative process, with the Treasury and the OBR exchanging proposals, projections and policy assumptions in successive rounds for a few weeks before Budget Day. The OBR thus always puts its seal of approval on the Chancellor’s package of measures; In fact, they are pre-approved. At this early stage of the proceedings, the treasury Formulating policies for development will be considered (such as radical reform of the planning system) and investment, to persuade the OBR to adjust its previously pessimistic view of productivity upwards.
The Chancellor now knows that raising income taxes is the only way to balance her budget. As the Institute for Fiscal Studies (IFS) has pointed out, trying to right the ship by raising a number of small taxes, rather than breaking Labour’s manifesto promise not to increase income tax, “would cause an unnecessary amount of economic damage”. That hurdle has been reiterated repeatedly over the past year, or at least until recently, when such radical action has clearly moved from the realm of the unachievable to the plausible.
In that column of her ledger, Ms. Reeves largely faces a choice between policies that will be politically effective in limiting the government’s historic decline in popularity, and those that will protect long-term economic growth.
As we have argued before, if the Chancellor is going to break the manifesto pledge, she should do so openly, in a way that raises significant sums, and in a way that is fair. It should raise the basic rate of income tax, which would take money from a broader base of taxpayers according to their ability to pay. This would apply to all types of income, including rent, dividends and interest: anyone who can afford to do so will pay, with those with higher incomes paying more.
On the other hand, attacks on savers, pensions, capital gains, property (“mansion tax”), banks and companies generally offer a politically palatable menu for Labour’s restive backbenchers, but will not help investment. After all, Labor MPs Minor reform of Social Security has already been vetoedAnd a “soak the rich” budget, it is believed in some circles, could protect the prime minister from a coup. But this will collapse Britain’s economy.
It should be clear in the Budget speech that in view of the demands of defence, control over public expenditure cannot be left aside, even by a Labor administration. The argument for welfare reform was briefly lost earlier this year, but that does not mean the project should be abandoned: it should be reinstated in this Budget and in the OBR’s decisions. Fuel duty, which has been frozen since 2011, could raise a handy sum, as could a levy on online gambling, but it was unlikely to generate enough revenue to plug the black hole.
And if anything, this time Ms. Reeves will need to give herself enough fiscal “headroom” for contingencies so that she doesn’t have to come back with another “tough” budget in 2026. His fiscal plan must be realistic and serious and must be observed. Neither the voters’ patience nor the markets’ patience, which has already been sorely tested, will survive a repeat of this “doom loop” showdown in a year’s time.