‘Deceiving’ Budget: Reeves to delay debt ‘repair’ amid interest rate hold fears
A left-leaning think tank has sounded the alarm on the the delay of the “repair job” for public finances after Rachel Reeves increased short-term borrowing levels to pay for higher welfare spending next year.
The Resolution Foundation, which was previously headed by Treasury minister Torsten Bell, suggested Rachel Reeves’ Budget was “deceiving” by back-loading consolidation measures after income tax thresholds were left frozen for another two years.
The Office for Budget Responsibility (OBR)’s forecasts show taxes increasing by just £700m next year while spending is set to surge by £6.6bn, indicating that borrowing will increase to pay for the government’s measures. In the 2029/30 forecast year, tax intake will increase to £26bn while spending will slow down with an increase of £11.3bn.
“By more than doubling the headroom against her fiscal rules, the Chancellor has taken steps to repair the public finances, too,” Resolution Foundation chief Ruth Curtice said.
“But appearances can be deceiving. Debt is up and most of the fiscal repair job has been put on hold for three years.”
Budget sparks interest rates war
Other economists have raised eyebrows at Reeves’ Budget plans to set the conditions for lower interest rates, which would allow government borrowing costs to ease and free up public finances.
Analysts at the consultancy Pantheon Macroeconomics have warned that the Budget did not give the Bank enough of a justification to plan further cuts in the new year after Reeves raised the national living wage.
“The medium-term inflation changes are small but, if anything, give the Monetary Policy Committee reason to cut rates more slowly after December than they previously planned,” Pantheon Macroeconomics’ Rob Wood and Elliott Jordan-Doak said.
“There is an inconsistency, we think, between the Chancellor trying to massage down headline inflation in the near term while supporting labour costs and demand. We think the MPC needs to tread carefully in responding to the Budget.”
By contrast, Panmure Liberum’s Simon French said there could be further interest rate cuts as Budget measures would not have a direct effect on pushing prices up.
“This was a less directly inflationary Budget than was the case twelve months ago,” French said.
“This opens a narrow path for multiple interest rate cuts from the Bank of England over the coming months.
“Additional fiscal headroom, now £22bn, alongside one binding fiscal forecast each year should reduce some of the marked-to-market speculation on remaining headroom that has damaged sentiment.”
Reeves vows to beat forecasts
Speaking to broadcasters on Thursday morning, Reeves said she had to raise taxes due to having to plan her Budget according to forecasts set by the OBR, which downgraded its productivity growth projections across the five-year period.
She insisted growth remained the top priority as she said the government was “determined” to beat forecasts set by the OBR.
“If we can grow the economy, as I’m determined to do, we can get that money back,” she told Times Radio.
She then told Sky News as part of her media tour that she did not believe the Budget breached the manifesto.
“We were very specific in the manifesto that we wouldn’t increase the rates of income tax, national insurance or VAT.
“I do recognise that yesterday I have asked working people to contribute a bit more by freezing those thresholds for a further three years from 2028.
“I’ve kept that contribution to an absolute minimum.”