Reeves vows to ‘defy’ gloomy economic forecasts
The Chancellor has vowed to “challenge” gloomy forecasts for the UK economy after it emerged the government faces a larger-than-expected deficit in the public finances.
Official forecaster the Office for Budget Responsibility (OBR) is preparing to slash Britain’s productivity performance (a measure of the economy’s output per hour worked), the BBC has learned.
Change in key measure could lead to removal of chancellor Facing a £20bn gap in meeting tax and spending rules It increases expectations that taxes will be increased in the budget next month.
Rachel Reeves said the OBR would “not rule out” any downgrades but was “committed not only to accepting the forecasts but to challenging them”.
In his article in the Guardian newspaper on Tuesday, the Chancellor touched upon the revelation that Britain’s productivity had fallen for the first time.
“These results [by the OBR] It will be delivered on budget next month and I won’t be buying these in advance. But I will be frank now that the productivity performance we inherited from the previous Conservative government and it has been so poor since the financial crisis,” Reeves said.
Speculation is mounting about what choices Reeves will make on tax and public spending ahead of the Autumn Budget in November.
He is expected to raise taxes after gloomy economic forecasts and a series of U-turns on welfare spending; This makes it difficult for him to comply with his self-imposed borrowing rules.
After announcing £40bn of tax increases in his previous budget last year, which included an increase in the amount employers must pay for National Insurance Contributions, Reeves said he “won’t be coming back” for further tax rises.
But economists at the Institute for Fiscal Studies (IFS) calculated a £22bn shortfall in the public finances and suggested Reeves would “almost certainly” have to raise taxes.
Lowering the UK’s productivity performance could cause this figure to rise even further.
Reeves has chosen to go on the offensive against the expected negative forecasts in recent days and tried to link the current economic situation to the previous Conservative government, along with Brexit and the Covid epidemic.
“Austerity, chaotic Brexit and the pandemic have left deep scars on the British economy that are still felt today,” he wrote.
“If productivity is our problem, then investment is our solution,” he added, outlining commitments to invest in the NHS, roads, railways, energy and defence, to “build Britain up”.
Reeves said there could be “no return to austerity”.
If it chooses not to cut public spending or borrow more, tax rises would be the likely option to keep the UK within fiscal rules designed to maintain credibility in the global financial markets from which it borrows.
The government has made growing the economy its main goal in order to improve living standards, but growth has remained slow since coming to power.
Some blamed Reeves’ tax increases in the previous budget (for example, the National Insurance increase for employers). to postpone business investment and job creation.
Many household budgets are also under pressure due to rising food and energy costs. This week, Britain’s leading supermarkets warned He warned that food prices could rise further if higher taxes are imposed on the sector.
The OBR is understood to have cut its productivity forecast by 0.3 percentage points.
The IFS calculated that for every 0.1 percentage point decline in the productivity forecast, government borrowing would rise by £7bn in 2029-30; This means a 0.3 percentage point cut could add as much as £21bn to the Budget deficit.
But there are other moving parts in the Budget that could cushion the Chancellor’s blow, such as lower interest rates paid on government debt.
Reeves said he acknowledged that “our country and our economy continue to face challenges.”
“I don’t need a spreadsheet to tell me that many working people in Britain feel the economy is unfair and not working for them, with the cost of living still putting pressure on family budgets,” he added.
“These decisions and the decisions I will make in the Budget do not come for free and they are not easy, but they are the right, fair and necessary choices.”
