When Rachel Reeves went out to sell her £40bn tax-raising budget on the airwaves, she offered a message of reassurance: ‘We don’t need to come back and ask for more.’ The Chancellor suggested that last month’s fiscal event would be the one and only big budget – she was making the tough decisions early on so the Labour government wouldn’t have to keep coming back and asking for more. However, as ministers get their heads around the incoming Trump presidency, doubts are growing as to whether Reeves will be able to stick to her pledge.
The problem is twofold. First, borrowing costs. If Donald Trump is true to his word on imposing tariffs on UK exports to the United States, it could have a negative effect on growth – which is already looking anaemic on recent projections. The Labour government will look to win an exemption (but in doing so could find themselves having to pick a side between the US and EU). Even if they succeed, borrowing costs are on the rise – they are 0.3 per cent higher than the OBR forecast. If this is accompanied by low growth, Reeves could wipe out her fiscal headroom.
Second, defence spending. While Reeves did announce a funding boost for the Ministry of Defence in the Budget, she stopped short of setting out a route to 2.5 per cent of GDP. It’s likely that Trump will put pressure on European countries to at minimum hit 2.5 per cent if not higher. If Reeves has to find more money for defence in the spending review – scheduled for spring next year – that means tough decisions elsewhere. For all the talk of a high tax, high borrowing, high spend budget, most of the money went on the NHS. Seven departments are on track for real-term cuts. That means money is tight – and if Reeves has to dig deep on defence or respond to higher borrowing costs, both tax rises and spending cuts could be on the horizon.
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