Rachel Reeves has signalled she wants to build a bigger reserve of cash at the Budget to avoid breaking her borrowing rules in future – paving the way for higher taxes or deeper spending cuts.
The Chancellor has promised to double down on her efforts to stabilise the public finances after a year in which markets have expressed concern at the ability of the Government to repay its debts.
And she said she wanted “sufficient headroom” to protect the UK’s economy against volatility in the years to come.
Treasury insiders acknowledge that building in a higher buffer would come with trade-offs because it would require more aggressive action on tax and spend at the Budget to reduce borrowing.
Building in more headroom could increase the chance that Reeves ends up raising income tax, which would be a breach of Labour’s election manifesto but would raise much more money than most other tax options.
And her reference to the need to consider spending will also boost speculation that the Chancellor will make a second push to cut the welfare bill, although any efforts to reduce spending on disability benefits have been deferred to next year.
It is the Chancellor’s latest hint that she wants to give herself greater headroom this time around. She said earlier this month: “In a world as volatile as it is today, having a bit more of a buffer can help absorb shocks.”
On Monday Reeves told an event in Riyadh, where she is holding talks with Saudi government officials and Gulf investors: “The underpinning for economic growth is stability and I’m not going to break the fiscal rules that we’ve set. We are going to reduce that primary deficit, we are going to see debt starting to fall as a share of GDP, because we need more sustainable public finances, especially in the uncertain world in which we live today.
“So, growth will be a big part of that Budget story, in a way that, frankly, I think growth has been neglected as a tool of fiscal policy in the last few years. We are looking, of course, at tax and spending to ensure that we both have resilience against future shocks by ensuring we’ve got sufficient headroom, and also just ensuring that those fiscal rules are adhered to.”
At last year’s Budget and the Spring Statement in March, Reeves gave herself a buffer of just £9.9bn against her self-imposed fiscal rules, which limit the amount the Treasury can borrow over a five-year timeframe.
That headroom is widely believed to have been wiped out by deteriorating economic forecasts and higher borrowing costs, meaning that the Chancellor will need to announce some combination of tax hikes and spending reductions at the Budget on 26 November.
A review of national productivity carried out by the Office for Budget Responsibility will conclude that long-term economic growth will be 0.3 percentage points slower than previously thought, according to the Financial Times – which on its own creates a black hole of more than £20bn.
And if Reeves only restores headroom to its previous level of around £10bn there is a one in three chance she will again end up in the red next year, the Institute for Fiscal Studies has calculated.
She is also pushing the Budget watchdog to acknowledge that Government policies such as building closer ties to the EU and reforming the planning system will boost growth, which tends to reduce borrowing.
Speaking in Saudi Arabia Reeves also defended taxes targeted at wealthier people which some say have pushed rich foreigners out of the UK. She said: “Everybody knows that countries around the world are having to spend more on defence, that we need to rebuild our public finances and our public services, and everyone who makes Britain their home should contribute to that.
“We don’t want to drive anyone out of the UK, but we do want to make sure that we tax people fairly, people who make Britain their home, whichever country they or their parents are originally from.”
