Choices. They define a chancellor’s tenure at the helm of Britain’s economy. But a failure to understand the impacts of your choices, to the extent that was exposed in Rachel Reeves’ emergency budget on Wednesday, risks fiscal calamity.
In October, the chancellor began her public spending spree with a multi-billion-pound, inflation-busting deal for her union paymasters, feeding an unreformed public sector as a reward for its lack of productivity. Let’s take health as an example. NHS England have said themselves that without an annual 4% boost in productivity there will be a shortfall in funding for service improvements. Why? Because the capital invested into the NHS by this Labour government is being swallowed up in these very pay rises, inflation, rising drug costs and, of course, the hike in National Insurance contributions. Labour is quick to claim it is improving the NHS, but the effects of Rachel Reeves’ choices confirm this is simply a political narrative.
But what else has she sacrificed? The beating heart of the British economy and critical growth stimulus, our businesses. Small businesses in particular have rued the crippling NIC rise, which places a financial blockade in front of exciting new opportunities for young people.
We’ve seen the stark economic impact of this already. Unemployment up and growth down. Having already risen by 40,000 since the autumn Budget, the OBR have said that unemployment is going to keep going up year-on-year. It’s almost like making it more difficult for companies to hire new employees has driven down jobs. Who could have predicted that?
The hostile environment created by the chancellor has shattered business confidence in the government, throwing into jeopardy investment opportunities. If she expects this is going to upturn any time soon, the absence of any impact assessment of Labour’s (or should I say the unions’) flagship Employment Rights Bill in the OBR’s latest growth forecasts scuppers this. Over 100,000 words of legislative red tape markedly shifts the employment landscape in Britain and sits at the epicentre of every assumption made about welfare, growth and the success of businesses. The magnitude of the impending economic earthquake caused by these French-style labour laws can only be imagined at this stage, but it could legitimately wipe out the one remaining percentage point of growth. Far from establishing business confidence to harvest growth, this is yet more uncertainty and stagnation.
Every point of productivity lost by the chancellor means an additional £40 billion in extra costs. Thanks to her public sector spending spree, lacklustre growth and high borrowing costs, she has already blown her razor-thin fiscal headroom once in the space of six months. Setting exactly the same tight headroom in the emergency budget, coupled with the impact of the Employment Rights Bill, could make it twice in a year — as well as see further downward revisions in growth at the time of the next autumn budget. With bond yields rising since the OBR’s locking-in of its February interest assumptions, Rachel Reeves may be in trouble sooner than she thinks.
And what will be the outcome? Tax hikes look increasingly likely if she is going to play by her own fiscal rules. I said that choices define a chancellor. Thanks to her reckless choices when she took office, it seems that sooner, or later, her hand will be forced — and it will be the British taxpayer left to pick up the bill.
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Source: Politics
