The biggest early surprise in this Budget may have been that the government’s independent forecaster Office for Budget Responsibility (OBR) managed to accidentally publish it long before Chancellor Rachel Reeves read it.
There is no example of this.
But the real surprise was that the government’s financial position was nowhere near as bad as had been made out in the discussion.
I warned in some live presentations not to buy into the protests entirely about how terrible the OBR forecast was. There are always a lot of moving parts when you do long-term projects.
Yes, the economy is projected to grow slower than expected because of long-term productivity declines, but it is starting from a better base this year due to better performance and upgrades.
Furthermore, high wages due to high inflation have boosted the treasury’s tax takings. Very interestingly, the OBR has also decided that Artificial Intelligence (AI) can increase productivity by a significant and increasing amount by the end of the year.
The net result of all this is that the OBR’s forecasts suggest that it could meet its self-imposed rules of borrowing only for investment and covering day-to-day spending with tax receipts, without lowering the income tax threshold.
Then why did he do more work than expected? By freezing the limits for the next three years until 2031, it is forcing most people to pay more taxes, including pulling nearly one in four people into a higher rate tax bracket.
Had it not been for her U-turn on welfare reforms, she might actually have been on track to meet her goal by a little bit before making any changes to tax and spending.
So that leads us to the bigger story of this two-part budget. A budget that borrows to spend on political priorities over the next year or so, and then taxes harder to finance the borrowing in the final years of the decade.
It’s about buying breathing space politically and economically. Both factors are inseparable.
By borrowing to spend, the Chancellor and Prime Minister have strengthened their immediate position in Parliament and appear to have eliminated the lingering doubts about passing their budget.
Left-wing Labor is supporting this budget because it is spending to help reduce child poverty, reduce energy bills and freeze rail fares and prescriptions. This is important for financial markets, which need to know whether they like the policies or not, that the government has the votes to pass its budget.
By subsequently imposing a harsh tax to double the amount of breathing space or headroom around his borrowing target to £22 billion a year, Reeves gets an escape from the uncomfortable glare of the markets. Add the fact that there will now be only annual scrutiny of fiscal rules instead of bi-annual scrutiny, and with a fair wind, it should quiet the hamster wheel of speculation about missing borrowing targets.
This has been a force for instability and lack of credibility last year, and ultimately led to a disastrous U-turn on welfare cuts over the summer.
The net result of all this, combined with slightly lower than expected UK government bond issuance, was that the markets remained largely quiet. Despite intraday fluctuations, effective interest rates on government bonds were down across the board, and on this occasion were down significantly by 10 basis points or 0.1% on major bonds.
This message has been heard in the markets and at first glance in his own party.
Now its price has come. Taxes will reach new records in 2028. How will it be linked with the need for development?
I discover an unspoken strategy. The government expects growth to exceed the solid pedestrian forecast of 1.5%. If that’s the case, we’ll probably never reach this extended border freeze.
It is also expected that the options chosen will enable the Bank of England to cut interest rates further.
Development will have to come to implement this. There is now some room for green shoots to sprout, or at least for the animal spirits of the economy to emerge from the continued chaos. This applies to business investment plans and older consumers who are accumulating savings and not spending.
This is no guarantee of success, but there is now some room for a more stable background.
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