Why Rachel Reeves Faces A Very Tricky Autumn Budget
Chancellor Rachel Reeves is in a "tricky" fiscal situation ahead of the autumn statement in November. (Alamy)
4 min read
The Chancellor is walking an economic tightrope heading into the Autumn Budget.
The Chancellor's determination to stick to her fiscal rules, while at the same time honouring Labour's manifesto pledges on tax, is expected to leave her with little room to manoeuvre when she takes to the despatch box at the end of November.
In the run-up to last year's general election, Labour pledged not to raise the three main taxes for "working people": National Insurance contributions, income tax and VAT. The party argues, despite fierce objections from its political opponents, that its decision last year to raise NI contributions for employers did not breach this promise.
Reeves has also repeatedly pledged to stick to her "iron-clad" fiscal rules to reassure the markets that the government will manage the economy responsibly.
As part of these self-imposed rules, which have been core to the Keir Starmer government's policy-making programme up to now, ministers must ensure that the day-to-day budget is heading for surplus and net financial debt falling as a percentage of GDP.
Meeting these fiscal rules is proving challenging for the Treasury, with the government's fiscal headroom — a term describing the amount of leeway the government has without breaking the rules — thought to be very narrow heading into the Budget.
Inflation remaining at 3.8 per cent on Wednesday added to the headache facing the government. Meanwhile, The Financial Times reported that productivity forecasts are expected to be downgraded by the independent Office for Budget Responsibility, putting more pressure on the public finances.
At the same time, however, the Prime Minister and the Chancellor are under political pressure to spend money in areas like public services and tackling poverty. Labour MPs, many of whom are frustrated with Starmer's leadership, are likely to be vocal about their spending demands heading into the Budget, not least because they feel threatened by the rise of Nigel Farage's Reform UK.
Taken together, the situation facing Reeves is "really tricky", according to Dr Isabel Stockton, senior research economist at the Institute for Fiscal Studies think tank.
When it comes to ways of raising revenue to tackle the so-called 'fiscal black hole', Stockton said the government's options are limited, especially given that planned cuts to winter fuel payments and welfare were dropped after fierce opposition from Labour MPs.
“Threshold freezes in the income tax system would still just about be consistent with those [manifesto] commitments," said Stockton.
"But they [the government] have not left themselves lots of room for manoeuver there, and we've just had a spending review that sets budgets for departmental spending, which means that they are probably not going to be willing to untie those again.”
These fiscal constraints are why many experts expect the government to announce further tax increases on 26 November.
This course of action would come with political difficulty for the government, given that Reeves said after last year's budget that she would not be "coming back" for more tax rises.
Pranesh Narayanan, senior research fellow at the Institute for Public Policy Research, agreed that there are "several reasons to think there might be tax rises needed in the Budget".
There is the impact that US President Donald Trump's tariffs have had on the global economy, he said, as well as the expected downgrading of productivity figures as reported by the FT.
Narayanan said that the government is struggling to deal with highly volatile financial markets, in which "any tiny change... is prompting a lot of speculation".
"We saw this recently: there was a climb in bond yields, and people are going into overdrive thinking, 'this means there is going to be x, y, z, tax increase’."
He added that the constant speculation about the government's fiscal situation meant ministers are "struggling with taking charge of the narrative".
"The government need to give themselves more headroom, and then a small increase in gilt yields, for example, won't call into question the fiscal rules, and if they’re going to have to do something on tax," he told PoliticsHome.
Jaya Sood, senior economist at the New Economics Foundation, told PoliticsHome that the core issue is that the UK's economic narrative was "really, really bad".
“Fiscal events, like budgets and spring statements, should provide an opportunity for the Chancellor to implement tax and spending policy that is aligned with her overall economic strategy: to bolster living standards and economic activity, achieve the government's missions and redistribute resources to create a fair and thriving economy," said Sood.
"But in the UK, these fiscal events have unfortunately become a scramble over how to fix a short-term, arbitrarily determined, so-called 'fiscal black hole'.”
Like Narayanan, Sood said the tight fiscal rules Reeves had set herself meant she was in a difficult situation, telling PoliticsHome that she had "completely boxed herself in".
Sood also predicted tax rises in the Budget, partly "because more spending cuts are politically impossible after the recent welfare u-turns".
"It's not necessarily a bad thing if the Chancellor raises revenues at this Budget, but they must be progressive tax changes that do not hammer low-income households, nor further exacerbate the never-ending cost of living crisis," she said.
