This afternoon, Keir Starmer recommitted to not raising income tax, VAT or employee National Insurance for the duration of this parliament. At the same time, he reiterated his support for Rachel Reeves’s ‘ironclad’ fiscal rules. Are both possible?
Answering a question from GB News’s Chris Hope at a visit to the Jaguar Land Rover factory in the West Midlands the Prime Minister said: ‘We made that commitment in the manifesto and we were absolutely clear about it going into the Budget and the Spring Statement, and that is a commitment we’ve made and a commitment we will keep.’
In response to an earlier question from Sky, he also stood by the Chancellor’s fiscal rules: ‘So, the reaction to the challenges of the last few days is not for us to say, well, the first thing we’ll now do is to put on one side our fiscal rules it is to remind people why we put them in place in the first place, which is to create the certainty that we need.’
But the main ‘ironclad’ fiscal rule – to have the current budget in surplus in five years time – is already under serious pressure. With only £9.9 billion of headroom against that rule as of last month’s Spring Statement, any economic turbulence could render it unachievable. If that modest cushion has already been wiped out, the only options left are tax rises or spending cuts.
When the Office for Budget Responsibility (OBR) scored Reeves’s Spring Statement, they did so while modelling several risk scenarios. On tariffs, for example, they outlined three broad possibilities:
- The US increases tariffs levied on goods arriving from China, Canada and Mexico by 20 percentage points, and these countries retaliate equivalently
- The US goes further by increasing tariffs on goods arriving from all other countries, including the UK, by 20 percentage points
- In addition to the above, all US trading partners, including the UK, retaliate against the US by imposing their own equivalent tariffs on US goods
Whilst Britain – thanks to its balanced goods trade with America – avoided joining the 20 per cent club, the scenario that seems most close to reality is the second one. And as more countries consider retaliation, we may be drifting toward the third.
But let’s say something close to scenario two comes to pass. According to the OBR’s modelling, GDP is 0.6 percentage points lower than in the forecast Chancellor has based her plans on. Inflation is higher than assumed and unemployment is up too. The result: in the words of the OBR this will ‘reduce the current surplus in the target year to almost zero’ (by almost zero they mean the headroom is £300 million – or 0.0 per cent of GDP). In other words her headroom is within a rounding error of being wiped out entirely and her fiscal rule broken.
Starmer’s way around the intractable problem of not raising taxes or abandoning the fiscal rules remains growth: ‘Because the first lever can’t be more taxes. My strong belief is that we have to grow our economy, create the conditions for our economy which we have done, there’s been record investment coming into our economy.’
But every day this tariff standoff drags on, growth prospects look gloomier. In the past few days Barclays and KPMG both downgraded their UK forecasts. Oxford Economics followed suit. And for Reeves’s growth-driven optimism to hold up, the OBR’s often too-rosey assumptions would need to be even more inaccurate than usual.
So with each new market jolt, Reeves’s slim margin erodes further. If the numbers deteriorate as expected, she’ll be left with a three-way choice: raise taxes, cut spending, or abandon her fiscal rules. Starmer appears to have ruled out the first and last options today.
Will he be eating his words come the autumn?
Comments