Rachel Reeves’s invidious choices in the Budget

Good morning. Chancellor Rachel Reeves briefed her cabinet colleagues yesterday on what promises to be a brutal Budget on October 30. 

In the lead-up to the election, Reeves repeatedly argued that growth would be her friend in her first Budget, as she played down the need for tax increases while insisting she could do more than the Tories to protect public services.  

There was no such fiscal fiction as she spoke to her colleagues in a one-hour meeting. The Budget was going to be but a first step towards rebuilding from what Reeves termed “14 years of damage”. 

The government will need to close a funding gap exceeding the £25bn identified by the Institute for Fiscal Studies if it is to address the enduring legacy of this year’s overspend, support the budgets of departments facing real-terms cuts, and pay for a better NHS. 

Up to £15bn more may need to be found on top of this if the chancellor wants to build up a sensible fiscal buffer for the remainder of the parliament, according to people close to the budget process. 

The £40bn figure is very much a moving target, with two weeks still to go before the Budget. But the gap speaks to the invidious trade-offs facing the chancellor, as she balances the need to protect departmental budgets from real-terms spending cuts while meeting manifesto commitments to avoid raising taxes on “working people”.

If you want to see those harsh choices first hand, I’d recommend having a go at the FT’s chancellor game (free to play), which we launched yesterday. 

Step into Reeves’s shoes

The game lets you choose a special adviser (known as a spad in Westminster parlance), who navigates you through a six-week process of setting spending and tax priorities leading up to budget day.

In doing so you run the gauntlet of disapproving civil service mandarins and blaring newspaper headlines as you attempt to close the gap between tax and spending while keeping room for the occasional fiscal sweetener (a rabbit in the hat) on Budget day.

The choices you make — juggling the need to boost the adoption of electric vehicles and buy fighter jets against calls to protect winter fuel payments and ease taxes — are far from easy.

We developed the game with the help of modelling from the Resolution Foundation think-tank. As it shows, Reeves’s new current budget deficit rule is emerging as the binding constraint as she plans for October 30.

Now termed a “golden rule”, in an echo of Gordon Brown when he was at the Treasury, the rule requires the government to eliminate the budget deficit, excluding spending on investment, over a five-year forecast. 

This will be no mean feat given Reeves’s effort to mitigate steep, real-terms departmental spending cuts and avoid a return to austerity. Her determination to improve NHS services and clamp down on waiting lists will not come cheap. 

Straightforward fundraising options, such as reversing the last government’s cuts in national insurance, would raise more than £20bn, taking Reeves a good way towards addressing her fiscal gap. 

But Reeves has ruled out higher taxes on “working people”, meaning she is having to scrabble elsewhere for tax-raising gambits. 

One option that is looking increasingly likely is lifting NI on employers, but further measures would be required on top of this, for example increases in capital gains tax, inheritance tax — and more. 

If the Treasury is able to find savings in the welfare budget this could also help shrink the black hole it is attempting to fill, but it is unlikely to be a game-changer. Higher growth forecasts from the Office for Budget Responsibility, as it digests the Treasury’s investment plans and planning reforms, could help. 

One benefit from making a convincing effort to meet the new golden rule is that it could bolster fiscal credibility, creating room for an adjustment in the fiscal rules to permit extra borrowing for investment. 

Since the Labour party conference, Reeves has been dropping heavy hints that such a change is in the works, as she vows to take better account of both assets and liabilities when the Treasury adds up the costs of investment projects.

Switching the debt target to one that recognises loans and equity of government investment vehicles such as the new National Wealth Fund would help towards that goal. Accordingly, the chancellor game also judges players against an alternative fiscal rule based on public sector net financial liabilities (PSNFL), which creates extra space for borrowing exceeding £50bn.

But even if Reeves finds space to lift public investment above the last government’s planned trajectory, as she probably will, it shouldn’t detract from the harsh decisions she will have to make on day-to-day spending.

Reeves was blunt about the difficult choices she faces in a recent interview with Andrew Marr for the New Statesman podcast, telling him there is “a big gap and we’ll have to set it all out in the Budget”.

That is likely to be the abiding message from a fiscal event that, in Reeves’s own words, aims to make an honest assessment of the public finances and “wipe the slate clean”. Players of the FT chancellor game are learning that this is no easy matter.

Now try this

Two days after the Budget, my colleagues and I will scrutinise the details in a live subscriber webinar at 1pm. You can sign up and send us your questions here.

If you’re feeling jaded after immersing yourself in the fiscal mess, I recommend some light relief with the second season of the Australian TV series Colin from Accounts. No budgetary arithmetic needed here, name notwithstanding.

Top stories today

• Back under target | UK inflation fell more than expected to a three-year low of 1.7 per cent in September, opening the door to more Bank of England interest rate cuts before the end of the year.

• Damp outlook | Britain’s privatised water companies may struggle to raise billions of pounds of much-needed equity by 2030 unless the regulator agrees to substantial increases in bills, Moody’s has warned.

• Give and take | The chair of the CBI has played down the potential impact on businesses of a rise in national insurance payments in the Budget, as annual accounts showed last year’s governance crisis pushed the lobby group to an £8mn financial loss.

• Pandemic-inspired unit | Keir Starmer is hoping to hack away at the “regulatory minefield” that is being blamed for slowing projects and approvals. Part of his solution is the Regulatory Innovation Office, or RIO, which is modelled on the UK’s Covid Vaccine Taskforce. The FT explains how it would work.

• Staring down bond vigilantes | Reeves shouldn’t be too worried by rising yields on UK government bonds, argues Toby Nangle. The context of the upcoming Budget is less “febrile” than it was when former prime minister Liz Truss published her infamous “mini” Budget.