Ex-Bank of England chief hits out at Rachel Reeves’ Budget as a ‘fiscal fandango’ that has ‘paralysed’ firms – but minister blames watchdog for ‘shifting sands’ uncertainty
The ‘fiscal fandango’ around Rachel Reeves’ Budget is causing ‘paralysis’ in the UK economy, a former Bank of England chief economist warned today.
Andy Haldane, who has worked on Threadneedle Street for more than 30 years, said ‘expensive’ speculation about tax rises had caused growth to ‘flatline’ in recent months.
Ahead of her second Budget on Wednesday, Ms Reeves faces a multibillion-pound black hole in the public finances.
Seeking to balance the books, the Chancellor is expected to raise billions of pounds by freezing income tax thresholds for a further two years, until 2030.
He is also said to be planning a raid on salary sacrifice schemes, including pensions; ‘mansion tax’ applied to expensive houses; and a pay-per-mile tax on electric cars.
But after a chaotic U-turn, Ms Reeves is thought to no longer be planning a 2p increase in income tax rates that would disrupt the Labor manifesto.
Paul Johnson, the former boss of the Institute for Fiscal Studies think tank, was another senior expert who blasted the Chancellor’s handling of the budget, describing it as a ‘mess’.
But one of Ms Reeves’s fellow cabinet ministers defended the pre-Budget process and blamed the Office for Budget Responsibility (OBR) watchdog for the uncertainty.
The ‘fiscal fandango’ around Rachel Reeves’ budget is causing ‘paralysis’ in the UK economy, a former Bank of England chief economist warned today.
Andy Haldane, who has worked on Threadneedle Street for more than 30 years, said “expensive” speculation about tax rises had caused growth to “flatline” in recent months
But Heidi Alexander, one of Ms Reeves’s Cabinet ministers, defended the pre-Budget process and blamed the Office for Budget Responsibility watchdog for the uncertainty
Speaking on the BBC’s Laura Kuenssberg program ahead of Wednesday’s Budget, broadcast on Sunday, Mr Haldane said: ‘We have had months of speculation; basically financial fandango.
‘And that’s been costly for the economy. It caused paralysis among businesses and consumers.
‘That’s the biggest reason why growth has remained stable, it’s stabilized in the second half of the year.’
After announcing a slew of tax rises in her Budget last year, Ms Reeves told businesses she would ‘not come back’ with tax increases in the coming years.
But as he struggles with a huge gap in public finances, he unveiled his latest fiscal package three days later, paving the way for a series of new tax increases.
Mr Haldane demanded Ms Reeves use her Budget on Wednesday to take ‘reprehensible action that will stamp out any notion of further tax rises’.
He also called for a ‘reimagining’ of the Budget process, which he said was ‘too long, too leaky and with real costs’.
“So let’s fix the possibility of tax increases for the foreseeable future and fix the Budget process,” he added.
While warning of a ‘Wile E. Coyote moment’, Mr Haldane suggested financial markets were concerned about the Labor Government’s ability to control public spending.
Ms Reeves is expected to spend around £3 billion a year extra on social care in her budget by removing the two-child benefit cap in a bid to appease Labor MPs.
‘Financial markets need to see some signs that this Government is capable of looking after public spending. ‘It really is,’ said Mr Haldane.
‘This is a delicate moment. There’s a risk of a Wile E. Coyote moment. In financial markets, the ground is disappearing under their feet. This must be avoided at all costs.’
Former Tory Chancellor Lord Ken Clarke warned there was a risk of a ‘serious financial crisis’ if the budget goes awry.
He told Times Radio: ‘If we get it wrong and continue to get it wrong we run the serious risk of a financial crisis.
‘It’s nice to say that we won’t be hostage to the bond markets.
‘Over the last decade we have accumulated such a mountain of debt that we have become hostage to the bond markets.’
Lord Clarke added that ahead of the Budget, Ms Reeves and her team gave the impression they ‘had no idea what to do’.
‘They radiated an atmosphere of gloom, dread and uncertainty,’ he continued.
Mr Johnson criticized ‘extraordinary’ speculation about Ms Reeves’ plans over the past few months.
“We speculated for months that this could happen, this could happen, almost anything could happen,” he told Sky News.
‘And then, of course, we had the extraordinary U-turn on the U-turn on the manifesto commitment. This is really damaging.
‘The first thing the Bank of England said in its latest report about the reason for the slow growth of the last few months was speculation about the Budget.
‘This was handled really badly.’
Asked to sum up the budget process in one word, Mr Johnson replied: ‘It’s a mess.’
Conservative Shadow Chancellor Sir Mel Stride dismissed Ms Reeves’ objections to ‘mansplaining’ as a ‘smokescreen’ on Sunday
But Transport Minister Heidi Alexander defended the pre-Budget process and said it was taking place on ‘shifting sands’.
The cabinet minister stressed that Ms Reeves had been informed by the OBR that she had to offer a larger-than-expected reduction in productivity forecasts.
It is estimated that this has left a new gap in the public finances of more than £20bn.
Ms Alexander told the BBC: “The OBR’s review of productivity forecasts means that this whole process is actually taking place on shifting sands to begin with and we have a very challenging global economic environment.”
In a recent newspaper interview, Ms Reeves said she was ‘tired of people explaining to me how to be Chancellor’ as she prepared for her budget.
But the Conservative Party’s shadow chancellor, Sir Mel Stride, dismissed Ms Reeves’ objections on Sunday, describing them as a ‘smokescreen’.
“This is nothing but nonsense being thrown into the air,” he told Sky News. ‘It’s a smokescreen that tries to distract us from what’s really going on. This isn’t about gender.
‘This is about mismanagement of the economy. And what Rachel Reeves cannot give up is the fact that unemployment is at a five-year high, inflation is spiraling, people are worse off, business confidence is at rock bottom, growth is anemic.
‘And I’m afraid all these difficulties depend on his choices.’
Sir Mel said he wanted to see Ms Reeves use her budget to ‘stand up and explain how she will control public spending, particularly welfare’.
“To make sure we don’t have to put in taxes and that he doesn’t break all the promises he made,” he added.
