The Financial Times’ Editor, Roula Khalaf, offers a selection of her favorite stories in a weekly newsletter. In anticipation of the UK Budget on October 30, the first under a Labour government since 2010, the atmosphere has been largely negative. The newly elected party has taken over an economy burdened by debt and slow growth, and taxes are expected to increase. Promises to avoid tax hikes for “working people,” alongside an estimated £40 billion shortfall in public finances and plans to increase borrowing, have raised concerns among businesses, investors, and financial markets.
Chancellor Rachel Reeves faces the challenge of addressing these concerns by demonstrating her ability to stabilize the British economy and create a more optimistic future. Her budget is expected to meet three essential criteria.
The first criterion is economic growth. Although the International Monetary Fund recently upgraded its forecast for UK’s growth in 2024, the long-term prospects remain weak. Reeves is tasked with ensuring that the current trend of low growth and rising taxes does not become a permanent fixture. This is a challenging task. While the government’s strategy to enhance public investment and simplify the planning system appears promising, the tax-raising plans should not overly burden key economic drivers. Furthermore, it is crucial for Reeves to propose comprehensive reforms to the tax and pension systems to foster growth and investment. Business leaders will evaluate her proposals holistically, and if her budget imposes excessive pressure on them without addressing barriers to scaling, hiring, and investment, the UK’s competitiveness could be compromised.
Secondly, Reeves’ spending proposals must be credible. She is advocating for this budget to commence the repair of the UK’s public services, with a commitment to avoid austerity and rejuvenate public investment. Enhancing funding for hospitals, courts, and schools lays the groundwork for the economy; however, spending should be paired with reforms to boost public sector productivity and generate savings. Without these measures, increasing demands on the public finances could lead to an ever-expanding state.
Regarding investment, Reeves should allocate additional borrowing toward projects that enhance growth, particularly improving the UK’s infrastructure. Rather than excessive spending, it is vital for the country to improve its ability to assess and execute investments efficiently, an area where the UK has historically struggled. More funding for public services and investment is only justified if it is utilized judiciously.
Lastly, the chancellor must gain the confidence of financial markets. Her primary fiscal rule of balancing day-to-day budgets signifies a commitment to fiscal responsibility and creates room for investment borrowing. However, bondholders still seek disciplined spending with credible, debt-based fiscal rules and evidence that funds will be directed toward productive investments.
Reeves is expected to highlight a new measure or definition of debt, which could increase borrowing capacity. Writing for the Financial Times, she also outlined new institutions to oversee spending. She needs to clearly articulate how this additional fiscal space will be used judiciously to prevent higher gilt yields from exacerbating the fiscal deficit.
In recent weeks, the Labour government has indicated that its budget aims to restore public services, encourage investment, support wealth creators, and address a financial shortfall. Reeves’ announcements must sufficiently address each of these areas, though achieving all objectives comprehensively may not be feasible.
For a government elected to improve Britain’s economic standing, the primary assessment for the chancellor on Wednesday will be whether a more favorable trajectory has been established for the nation. Emphasizing growth, prudent expenditure, and a credible fiscal framework would be beneficial.