Rachel Reeves alerts top investors on tax rises and spending cuts
Chancellor Rachel Reeves has sent a message to international investors on incoming tax hikes and spending cuts in an effort to ease market nerves ahead of this year’s Budget.
Speaking at the Future Investment Initiative – or ‘Davos in the Desert’ – in Riyadh, Saudi Arabia, Reeves prepared investors for a more difficult Budget next month as she talked up her commitment to her fiscal rules.
The Chancellor, who is set to meet Trump administration officials and Saudi royals in the coming days, indicated she would look to build a bigger fiscal headroom than £9.9bn in order to futureproof the UK economy against any incoming shocks.
On her trip to the Middle East with the investment minister Jason Stockwood, Reeves is pushing for a new trade deal with the Gulf Cooperation Council (GCC), an economic bloc consisting of the likes of Saudi Arabia, Qatar, the United Arab Emirates and Oman.
The hope is that through such deals the Chancellor can improve growth forecasts, thereby persuading the Office for Budget Responsibility to take a more generous view of the UK’s prospects for exporting and productivity.
In front of an audience of some of the world’s richest businessmen and women, Reeves said: “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.”
The comments reflect the Chancellor’s efforts to lessen the hit of Budget surprises and calm gilt traders, who have recently taken a more positive view of the UK economy’s future by buying up UK government bonds in the last month.
Reeves vows to get debt falling
Reeves highlighted her commitment to roll out growth-focused policies, which she said had not been used effectively by her Tory predecessors.
She also emphasised she would look to see debt fall as a share of GDP over the course of parliament and stop day-to-day spending outgunning tax receipts.
However, her fiscal rules state that public sector net financial liabilities, an alternative measure of government debt that covers a broader range of financial assets, and the current budget deficit should fall over a three-year rolling forecast period.
“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.”
“Frankly, I think growth has been neglected as a tool of fiscal policy in the last few years.”
Reeves ‘considering income tax raid’
Former Chancellor and Prime Minister Rishi Sunak suggested on Sunday that Reeves would face a smaller fiscal hole than £30bn sums calculated by some City forecasters.
In a newspaper column in The Sunday Times, Sunak wrote: “Her willingness to discuss increasing the budget headroom beyond the £10bn she left last autumn suggests the first round of OBR forecasts hasn’t been as bad as feared.
“It indicates that Reeves is looking at a hole closer to £20bn than £30bn, despite how bad this September’s borrowing figures have been.”
Leading economists, including former Institute for Fiscal Studies (IFS) director Paul Johnson, have said that a bigger headroom would allow Reeves to avoid tax speculation damaging growth prospects before future Budgets.
Reports on the weekend suggested Reeves was considering raising income tax, which would represent a breach of a key Labour Party manifesto and trigger an almighty political battle.
The move, which has been endorsed by leading think tanks and City economists as the ‘least bad option’, would allow the Chancellor to raise significant sums of revenue without “tinkering” around smaller taxes.