Reeves vows to 'defy' gloomy economic forecasts

🏛️Chancellor Vows to Defy Gloomy Economic Forecasts

The Chancellor has promised to defy gloomy forecasts for the UK economy after learning that the government is facing a larger-than-expected deficit in the public budget. The Office for Budget Responsibility (OBR), the official forecaster, is expected to downgrade the UK's productivity forecasts, which measure the economy's output per hour of labour.

This expected change to the main economic measure may result in the Chancellor facing a £20 billion deficit in complying with her tax and budget regulations, making tax increases at next month's Budget more likely.

Rachel Reeves, the shadow chancellor, said she would not pre-empt any downgrade by the OBR. However, she stated: "I am determined that we don't only accept the forecasts but defy them."

📉 Productivity and Fiscal Challenges

Writing in The Guardian newspaper on Tuesday, the Chancellor addressed the potential downgrade in the UK’s economic growth for the first time.

"Those findings [by the OBR] will be published at the Budget next month, and I am not going to pre-empt them," the Chancellor wrote.

Referring to productivity, Reeves said: "We inherited it from the previous Conservative government, and it hasn't been good since the financial crisis."

Reeves' choices on tax and public spending are intensifying ahead of the Autumn Budget in November. Following gloomy economic forecasts and a string of U-turns on cuts to welfare spending that have made it more difficult for her to comply with her self-imposed borrowing standards, she is expected to raise taxes.

Reeves had said she was "not coming back" for more tax hikes after announcing increases in her previous Budget last year, which included a rise in the amount employers are required to pay in National Insurance Contributions. However, economists at the Institute for Fiscal Studies (IFS) estimated a shortfall of £22 billion in the public budget, suggesting that Reeves would most likely have to raise taxes. This figure could rise if the UK's productivity forecasts are downgraded.

🛡️ Pinning Blame and Promising Investment

Reeves has opted to go on the offensive against the expected negative forecasts, seeking to pin the current economic crisis on the former Conservative government, as well as Brexit and the Covid pandemic.

"Austerity, a tumultuous Brexit, and the pandemic have all left deep scars on the British economy, which are still present today," she wrote.

Promising investment in the NHS, roads, rail, electricity, and defence to "get Britain building," she stated: "If quality is our challenge, then investment is our answer."

According to Reeves, there may be "no return to austerity." If she chooses not to reduce public expenditures or borrow more money, tax hikes remain the most likely alternative for her to keep her fiscal rules in force, which are designed to protect the UK's capital markets.

🗣️ Political Opposition

Mel Stride, the shadow chancellor, criticised Reeves’ choices, saying:

"This isn't about events or excuses. It's about choices. And the Chancellor is making the wrong decisions. Rachel Reeves' choices will put your future in jeopardy."

📊 The Cost of Downgraded Productivity

The government has made increasing the economy its top priority since winning power, in an attempt to raise living standards. Some have criticised Reeves' previous tax hikes, such as the increase in National Insurance for employers, for potentially deterring company investment and job creation.

Reports suggest the OBR has downgraded the productivity forecast by 0.25 percentage points. The IFS has estimated that a one-point decline in the productivity forecast in 2029-30 will raise government borrowing by $\pounds 7$ billion. This implies that a 0.3-point cut could add as much as $\pounds 21$ billion to the Budget hole.

However, there are other significant areas in the Budget that may help the Chancellor, such as the potential decrease in the interest rates paid on government debt.

Reeves acknowledged that "our country and our economy continue to face challenges."

She concluded: "I don't need a spreadsheet to tell me that too many working people in the United Kingdom are unhappy, and things are not working well for them, with the cost of living rising and squeezing family budgets. These decisions—and the decisions I'll make at the Budget—don't come for free and aren't straightforward, but they are the right, fair, and necessary choices."