The great hope I have for a Budget is that it economically adds up and delivers economic and social justice at the same time.
I have already noted that this was a profoundly unfair budget in which the greatest burdens will fall on those with lower pay, the young, and smaller businesses.
But does all that Reeves is doing make economic sense to justify this? The answer is a resounding no.
Ignore the fact that there is nothing in this Budget to stop universities and local authorities from going bust, as is thought likely to happen in both cases.
Ignore, too, that this budget has almost no green impact, but it actually makes things worse by promoting carbon capture and storage.
And ignore that much of the claimed investment has nothing to do with this government, and will instead be 'catalysed' (whatever that means) by Rachel Reeves' tiny national wealth fund.
Instead, let's look at some of the so-called facts included in the Office for Budget Responsibility's budget report.
I say 'so-called' for a good reason. There is no chance things will work out as the Office for Budget Responsibility says. They have a disastrous track record of massively overestimating the benefits of anything any Chancellor has said.
Let's start with growth in that case, which is Labour's great desire. This is the OBR forecast:
There are some supposedly short-term boosts from what Reeves said. Then things tail off. In fact, outcomes are worse than the OBR forecast in March - and ignore all the nonsense that they were not told facts. It was their job to ask. Overall, this ranks as a failure.
However, taxes will rise:
There is no way in which this will not be noticed: it will be.
This will supposedly help balance the books as borrowing as a proportion of GDP is forecast to fall:
In fact, so bizarre is her plan that she will actually be taking more tax out of the economy than she will be spending into it on current expenditures quite soon. That is economic madness and directly recessionary.
Unsurprisingly, households will save less as a result, as the sectoral balances show:
That yellow line implies households will be feeling worse off.
Then, note the assumption that businesses will borrow heavily, for which there is no evidential support, but supports my suggestion that most of the investment Reeves thinks will happen will be paid for by business, even though the economy is going to be fairly stagnant.
And, bizarrely, it is assumed that the overseas sector will save more in the UK, for which there is no evidence at all.
The clearest possible message from this chart is that Reeves' plan makes no sense.
Other elements are also troubling, like this chart on forecast Bank of England base interest rates:
Something around 4 per cent is here for good, apparently. That is profoundly recessionary when inflation is forecast as follows:
This is apparently also fixed, but at about 2 per cent less than the Bank of England interest rate - which means we are going to live with net positive interest rates for the first time for a long time, and when net negative rates did not deliver growth we can be quite sure net positive ones will not do so.
And what does this do for the deficit? This is the forecast range:
That deficit supposedly disappears. However, public spending as a proportion of GDP is high:
This is because of supposed government investment, and yet the forecast is that this will not deliver growth.
So what is wrong?
Is the forecast for the benefit of investment wrong? It might be.
Is Reeves simply not doing enough - because nothing she is doing is going to do much to improve any public service? That is obviously arguable. The drain on poor public services remains in place as a result. That is a very good reason why GDP will remain low - and hence this ratio will be high.
And maybe the OBR, dedicated as it is to short-term views, has got everything wrong.
Or, Reeves has got it wrong by hitting the poorest small businesses and the real economy hard in this budget whilst leaving the rich, speculators and the City very largely alone.
Of these options, the last is most plausible to me. Reeves has tinkered rather than show her faith in the ability of the country to actually deliver, but only if its public sector is in good order.
Instead, the only possible explanation for what she has done is to prove she can create and supposedly deliver a fiscal rule. The figures I have noted only makes sense if it's appreciated that she started off with the goal of doing those two things, and everything works backwards from that point. Then her figures do make sense - but only to her, because no one else gives a damn about her rule or whether she complies with it or not, because they already know she won't.
But we're going to pay a mighty large price in terms of economic failure purely to serve her economic vanity as it is at this moment.
And that is why this Budget will fail. It is offering limited new money for services, higher taxes, continued high interest rates, the risk of growing unemployment, the possibility of a recession and, at best, low growth, and all so Reeves can balance her books. Rarely will an obsession have been so costly.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
After a quick look at the the Guardian it’s obvious its journalists haven’t got a clue why the Starmer & Co budget is deflationary. You may as well be reading the Daily Mail!
When the Tories came in in 2010, they disbanded the new Tenant Services Authority (TSA) for social housing; prior to that they have got rid of entities they don’t like like the Wage Councils, made life harder for the Unions and latterly the EU.
If I had come in as a PM , the OBR would have been first on my list for the chop. It is just a mirror held up to reflect the glory of George Osbourne and all the evil glee he brought to his chancellorship.
And now Reeves and the Labour party bow down to and worship it.
Ridiculous. Absurd.
You can only rule truly as you see fit if your make the exception. Clem Attlee did that after the war and the Tory party many times since.
Labour. What a bunch of wimps.
Thatcher was right – this Labour party IS perhaps her greatest creation.
The attempt of the Labour right to distinguish themselves from Corbyn made this trap for them; they were obsessed that ‘big spending’ (in reality a social democratic mode of governance), was wrong, and so they went all the way to Osborne to compensate.
Now Reeves has either to try and wriggle out (her re-jigging of the rules being one example) by finding enough loopholes (unlikely!), else cause the same misery the Tories did. The only alternative is to completely reverse course; but I think that can only happen after Reeves has been deposed (absent a black swan to give her justification).
Reeves, the opposition, the media, all start with the premise that reality, unfolding events, the future, must be shoe-horned into a market constructed simulacrum based upon the sanctity of the two fiscal rules.
The events in South East Spain tell us that nature pays little repect to such rules. Of course we must have rules, and we must have rules about taxation and borrowing but they must be set with the knowledge that survival must come before money.
Reeves has now brought about a position where, within her own iron logic, she has no reactive capacity going forward in a world determined by the likes of Trump, Netanyahu and Musk.
Instead of discussing the impasse that authordox monetary theory has placed us in the media concentrates on rising gilt yields. Telling us that the falling value of a traded instrument somehow determines future borrowing costs, but not explaing how.
Reminds me of the joke about the legislature demanding the electorate be disbanded, and another elected. Except more extreme – they want the laws of physics, and geopolitical realities to be disbanded, and new ones elected.
I think I was Ed Balls who made the argument about the need for balancing the books, ignoring the climate in the process. By this logic, before you jump out of an aircraft you’d only put on a parachute if you felt its cost was manageable!
D’oh! ‘it was Ed Balls’, not ‘I was Ed Balls’.
I categorically deny ever having been Ed Balls!
Another great post Richard. Your predictions that go against the ‘official’ spin (e.g., OBR, government, BoE etc) regarding inflation and growth I think will unfortunately come true. Not just that you actually use logic and scientific rational for your predictions (which makes them more credible and likely to become true), but history tells us that your predictions will come true.
We are likely coming to an end of a business cycle (approx. 18 year cycle), also known as a boom bust cycle, as you may well know. A term phrased by a chap called Fred Harrison who has done a lot of research into this and demonstrates it has occurred for the past 300 years. Hence, by approx. 2026, we are likely to have reached the peak of the economic cycle before massive recession / depression kicks in. This will likely look, among lots of things, a massive stock market and house price collapse. We are now just missing the one extra key ingredient, unemployment to massively rise – which will likely come with the decisions being made.
It would seem from governments around the world, including ours, they are either purposely trying to cause this crash (e.g., political choices and high interest rates) or really are completely incompetent. Or there’s another option, do governments really have any power (especially in the neoliberal world we live in).
And what happens when we have a depression (like in 1928)? We get facism, which is already on the rise. Labour really do have the last opportunity in my opinion, to stop the far right getting into power in the UK in 2029. However, it would seem they do not want to/care about this.
I think inequality is what drives these outcomes, which western governments seem to not want to solve.
Richard,
Isn’t the explanation for the assumption of high levels of funding from the rest of the world based on high levels of inward investment by the american multinationals set to increase their domination of the UK economy and from the UK maintaining higher levels of interest to attract hot money from overseas?.
You say there is no evidence to support this but isn’t this precisely what has happened for the past decade and more
(see chart 2.17 above) and signaled by the desire of the BOE and Reeves to maintain higher than average interest rates and to remain open and willing to inward investment.
Maybe…
But all it really confirms is a continuing trade deficit with those owed money willing to leave it in sterling