Rachel Reeves is going to break a promise. But which one?
Good intentions collide with economic reality
There are few things HM Treasury delights in more than being seen to be leading by example. When I was a civil servant at the department (during which I failed spectacularly to bring financial stability to Northern Ireland or raise fuel duty), nothing was free. The office Christmas party was a paid-for affair while a ‘large’ tea in the canteen cost 20p more than a ‘regular’ when it was literally just 100ml more of not-quite-boiling water.
This ostentatious parsimony is not about impressing the public or avoiding negative media coverage. Instead, it is directed squarely at other government departments. If you believe its loudest detractors, the Treasury is preternaturally anti-growth, the organisational equivalent of an unemployed person who cancels their internet service to save money, but now cannot apply for a job. Treasury brain, or Treasury orthodoxy, is a criticism levelled from both the big spending left and Liz Trussite right. Neither quite nails it.
The Treasury is certainly more than capable of finding false economies, but the real cleavage is between it and other government departments. The Treasury essentially believes it must protect the public finances because it is the only one that cares about them. The Department for Transport wants to spend money on things that move, the Department of Health on machines that keep people alive and so on. The more persuasive criticism, in my view, isn’t about Treasury orthodoxy, but Treasury power. And that power is never more obvious than during a fiscal event.
A little bit of history. For reasons relating to a 1975 Act of Parliament, the government must publish two economic updates per year. The Autumn (or, depending on the season, Spring) statement is supposed to outline economic forecasts and departmental spending allocations, whereas the Budget handles big-ticket items such as taxation. But that distinction has become a little blurred by various chancellors:
In 1993, Ken Clarke moved the date of the Budget from spring to autumn, combining the announcement of spending with the Budget
In 1997, Gordon Brown moved the Budget back to the spring, replacing the second statement with the Pre-Budget Report (PBR)
In 2010, George Osborne replaced the PBR with an Autumn Statement focussing on economic growth and public finances as forecast by the Office for Budget Responsibility (OBR)
In 2016, Philip Hammond announced his intention to end the Autumn Statement, replacing it with a Spring Statement followed by a Budget in the autumn
In 2024, Rachel Reeves promised to hold only “one major fiscal event a year”
Is that clear?
That Britain effectively had two Budgets per year led to criticism from the likes of the Institute for Government, that chancellors were too often tinkering with policy, to the detriment of the operation of government and the wider economy. Hence Reeves’s commitment to holding only one per year, with a Spring Statement largely restricted to providing an update on the economic and fiscal outlook. The question is, can she stick to it?
You may recall that the Budget last autumn was a pretty major event. The chancellor raised taxes by £40bn and spending by £70bn (or a little over 2% of GDP) a year over the next five years. She later attempted to assure businesses hit by higher taxes that she would not be “coming back” for more in future years. But the world of spring 2025 is different to that of autumn 2024.
In the intervening period, Donald Trump won the US presidency, launched a trade war with Canada and Mexico, switched sides in the Ukraine war, repeatedly called into question the value of Nato and began the process of tanking the American (and thereby global) economy. This before any tariffs are levied specifically on the UK, though those on Canada, Mexico and the EU will indirectly harm the British economy.
Further complicating matters is that, in the Budget last October, Reeves elected to leave herself less than £10bn of fiscal headroom – that is, the financial buffer left over to meet her fiscal rules1. Given the economic and geopolitical turmoil of recent days/weeks/months, the OBR is expected to confirm that that headroom no longer exists, while economic growth has been revised downward.
Reeves is trapped in a pincer movement, partly of her own making. Whatever move the chancellor makes is likely to involve the breaking of a promise. There is, inevitably, a German word2 for her predicament: Zugzwang. This is a scenario often associated with chess, where any legal move will lead to a deterioration in the player’s position.
Reeves can stick to her commitment not to raise taxes or to hold a second major fiscal event in the year, but may in doing so break her fiscal rules. She can raise taxes, but thereby break her word to businesses and her manifesto commitment not to hold a second major fiscal event. Or she can stick to her promise on one fiscal event, and cut spending (day-to-day public service funding is set to rise by 1.3% per year in real terms after 2025/26), thereby sending already agitated Labour backbenchers into convulsions.
And all the while, the spectre of the mini-Budget looms. Barely two-and-a-half years ago, the UK experienced a gilts crisis. And while Reeves shares little with Kwasi Kwarteng, a so-called ‘moron premium’ still haunts the UK. Consequently, should the chancellor be forced to choose between breaking her fiscal rules, spooking the markets or breaking her promise not to hold a second major fiscal event a year, the latter is the most likely to be ditched.
Thank you for reading and sorry to keep droning on about how I used to work at the Treasury. To be fair, I was hopeless at it. Please consider sharing this newsletter so I don’t have to go back.
First, that day-to day spending be paid for by revenue, not borrowing. Second, that debt be falling as a share of national income by 2028/29
Is there a German word for the feeling you get when you think there ought to be a German word for something?