Labour’s Chancellor Rachel Reeves faces a difficult decision if the independent Office for Budget Responsibility (OBR) delivers news that the government is not on course to meet its fiscal rules on 26 March. Reeves is committed only to making significant tax and spend announcements once a year at the autumn Budget. However, if the OBR delivers bad news, Reeves may need to break this commitment and announce measures. Darren Jones, the Chief Secretary to the Treasury, said that spending restraint would be necessary given Boris Johnson’s announcement of an increase in employers’ National Insurance rates in October.
Spending restraint does not necessarily mean spending cuts, but much lower spending increases than would otherwise happen. This is a potential collision between economics and politics that can be viewed as tricky terrain. Though measures may prove economically viable, Labour MPs may disagree and find it politically unviable. Many MPs believe that there is little fat left to trim from the state, and they were already anxious about a tough multi-year spending review that was expected to conclude around June.
A fear exists among some that Conservative governments dealt with similar problems by piling the most painful spending measures towards the end of five-year forecast periods, hoping that the circumstances at those “pencilled-in” measures would have changed. It is a political worst-case scenario for Reeves if shared beliefs in how to best run the economy turn out to be products of the low-interest-rate era and markets disagree. All are watching anxiously to see how things develop as the UK government must meet the set fiscal rules.
It is crucial that the government meets these fiscal rules set by Reeves so that Labour gains economic credibility. The recent rise in government borrowing costs poses a danger for the Treasury and Sir Keir Starmer’s political project should the government have to spend more money paying interest on the debt. It is important to stick to these rules as they are a crucial test of the government’s credibility
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