The Spring Statement was extra fairytale economics damaging our future: SIMON LAMBERT
As a piece of political theatre, Rachel Reeves’ Spring Statement could be classed as a farce.
Not because of the content of the Chancellor’s speech. Albeit it was a pretty painful mix of glossing over, attempted point scoring, daft phrases like ‘builders not blockers’, and reeling out numbers.
But instead, because the entire concept is farcical – Reeves was trying to meet fiscal rules that she invented herself, using economic forecasts that will almost certainly turn out to be wrong.
To be fair, that’s not entirely her fault. Reeves is merely following in the footsteps of her predecessors who decided that meeting arbitrary rules, using five-year projections that can’t be accurate, is a great way to make decisions on Britain’s future.
Our future success and prosperity are beholden to this exercise in high functioning deckchair shuffling.
Shuffling deckchairs: Rachel Reeves’ Spring Statement involved meeting fiscal rules she invented with five-year forecasts that will almost certainly be wrong
Having delivered her new take on former Chancellor Jeremy Hunt’s fiscal rules in the Autumn Budget – the ninth change to them in 16 years – Reeves found she had put herself between a rock and a hard place for the Spring Statement.
Less than five months after the Chancellor laid out Budget tax hikes and spending rises, she found herself waylaid by a downturn in economic forecasts and a rise in government borrowing costs.
In the Budget at the end of October, the Chancellor revealed her two fiscal rules:
The stability rule
The current budget should be on course to be in balance or surplus by 2029/30. This requires day-to-day spending to be met by revenues, aka tax. At this point the government should only be borrowing to invest.
The current budget deficit: Fiscal rules need this to balance or become a surplus by 2029
The investment rule
Net financial debt should fall as a share of the economy in 2029/30. This requires public sector net borrowing to be forecast to be lower in 2029/30 than the year before, as a share of GDP.
Public sector borrowing: Fiscal rules need this to be falling as a percentage of GDP by 2029
She uses forecasts from the Office of Budget Responsibility to judge whether she will meet these rules. These forecasts are based on market expectations and what it models will happen using Reeves’ own tax and spending plans.
It’s considered a wise move for Chancellors to leave some headroom to allow for things not quite going to plan. Ideally, the more the better.
Reeves cut it pretty fine by historic standards in the Budget, leaving herself just £9.9billion. To put this in context, the UK’s annual government spending is roughly 124 times that at £1.23trillion.
You should really avoid comparing government budgets to household ones, but to get a handle on the difference between those numbers it is the equivalent of someone earning £50,000 a year giving themselves £403 of leeway.
By spring the wriggle room Reeves left herself in autumn had vanished. A much lower growth forecast for this year meant less money would come in from tax, while higher government borrowing costs meant that the cost of dealing with the UK’s huge debt had risen substantially.
In a further blow, government borrowing has also been above previous expectations.
This left Reeves with three choices:
- Adjust her fiscal rules – something she certainly wouldn’t want to do just months in.
- Raise taxes – an unpalatable option after the Autumn Budget’s £40billion of hikes.
- Cut spending – this would also prove hugely unpopular, but it became clear it would be the direction of travel
In the end, the OBR delivered a sizeable dollop of bad news but just enough good news to rescue the Chancellor from having to inflict a lot more pain.
The GDP growth forecast for this year was slashed in half from 2 per cent to 1 per cent.
Long-term government borrowing costs are also forecast to be higher, averaging 4.8 per cent over the next five years, compared to a 4.4 per cent prediction in the Budget.
Overall, the OBR said that ‘higher debt interest payments and weaker-than-expected receipts take the current balance from a surplus of £9.9 billion to a deficit of £4.1 billion in 2029-30’.
This left the Chancellor needing to find £14billion to get the UK’s projected 2029 finances back to where she’d left them at the end of October.
Interestingly, she chose to do exactly that.
Among the measures announced were a welfare spending crackdown, revealed last week and stepped up, big day-to-day departmental spending cuts, and that old favourite of many a Chancellor, a tax avoidance crackdown.
Reeves also produced her ‘get out of jail free’ card with a flourish. The OBR has decided Labour’s planning reforms and housebuilding push will boost economic output by 0.2 per cent by 2029.
Beyond this year’s woeful 1 per cent forecast, growth predictions have been upgraded for 2026, 2027, 2028 and 2029. Albeit, this relies on a sudden burst of improvement in our perenially disappointing productivity.
And so, the package in total was worth exactly £14billion and took Reeves back to her £9.9billion of headroom.
I imagine the Chancellor liked the symbolic nature of returning to the exact same number but if anything, it only serves to underline the ridiculousness of the whole situation.
We are expected to believe in not one but two fairytale scenarios.
That Rachel Reeves has somehow precisely rebalanced the books and the OBR’s forecasts are going to be right, despite already being wrong compared to less than five months ago.
And this flight of fancy is what we base decisions on for the long-term prosperity of our country and the health and wealth of its citizens.
We are restricting our choices, hampering our public services, and warping our tax code to meet made-up fiscal rules based on hit-or-miss forecasts.
And we’ve now been doing this for so long, we don’t seem to be able to stop.
I’m not advocating a Trussian revolution against balancing the books but on the basis that we can’t predict what Donald Trump will do to our economy next week, our tax system is bust, and our public services are falling apart at the seams, maybe we should try a different approach.
We are stuck in a doom loop of low growth and forced bad decisions.
The good news is that if by some miracle these forecasts are correct, the OBR says we will each be £500 a year better off by 2029.
That’s £42 per month. What will you spend yours on?
