With tax speculation festering, Rachel Reeves needs to show her hand | Richard Partington
The cruel summer of speculation is here.Barely a day passes without the chancellor, Rachel Reeves, waking to another newspaper headline about possible tax-raising options for her autumn budget.After the bonanza of June’s spending review, Reeves had been warned that uncertainty about the public finances would set tongues wagging.Britain’s economy has far from shot the lights out since, the global backdrop remains fairly bleak, borrowing costs are high, and inflationary pressures are building.This week marks the point at which November becomes the earliest date the chancellor can hold her budget, given the 10 weeks’ notice she must provide the Office for Budget Responsibility (OBR) to prepare its forecasts.
Between now and then will feel like a near carbon copy of Labour’s first months in office, packed with rumours about a tax-laden autumn budget, only worse: this time the feelgood spending decisions have already been announced.Within the Treasury officials are running the rule over several options.However, forecasters are unclear about just how much needs to be done; causing a headache for Labour by sending the rumour mill into overdrive.On the most extreme estimates, Reeves is facing a shortfall of as much as £50bn to maintain the same headroom against her self-imposed fiscal rules as she had left herself in the spring.Others say the sum could be as little as £17bn.
Any talk of such a “black hole” is still obviously bad news.After Reeves blasted Jeremy Hunt for leaving Labour a £22bn shortfall ahead of the last autumn budget, deflecting blame will be tougher a second time around.Still, the uncertainty ought to be illustrative.Forecasting the British economy at the moment is a fool’s errand.On the one hand, inflationary pressures are building and unemployment is rising.
Growth remains weak and Donald Trump’s trade war looms in the background.On the other hand, wage settlements are still robust, and business activity, consumer sentiment and public borrowing levels appear stronger than anticipated.Mired in the fog, the Bank of England’s monetary policy committee required an unprecedented two rounds of voting this month to overcome a split decision on interest rates.A slim majority on the nine-strong panel felt that a weak economic outlook required a cut in borrowing costs, while others – including the MPC’s deputy governor, Clare Lombardelli, and the Bank’s chief economist, Huw Pill – felt that growth was resilient enough, and feared inflationary pressures.Woeful data quality from the Office for National Statistics – where several key economic indicators are bogged down with issues – is making matters worse, with the Newport-based agency openly described by experienced economists as “a shower” and “in chaos”.
Ahead of the autumn budget, the OBR is working to update its assessment of the economy’s productive capacity.Most economists predict a hefty downgrade, which could add £20bn to Reeves’s budget shortfall.But two key datasets for the measurement of output per hour of work, GDP and the labour force survey, are prone to revision or are being fixed because of quality issues.Taking all of this together, analysts at the Japanese bank Mizuho last week warned global investors looking at Britain: “It’s hard to know if we’re looking at a truthful message.Forget summer holidays, it’s survival camp and the compass is broken.
”But while extracting the signal from the noise – as economists describe the job of translating messy data – is a thankless task, somebody has to do it,And the danger is that missteps will be made as policymakers rush to turn around years of underperformance,Sign up to Business TodayGet set for the working day – we'll point you to all the business news and analysis you need every morningafter newsletter promotionPart of the reason Reeves has not set a budget date is the hope that things will improve as summer turns to autumn,But because she left slim headroom against her fiscal rules at the spring statement, even small negative developments have the capacity to blow things off course,While Labour has signalled that it will roll the pitch to manage budget expectations, so far it has left tax speculation to fester.
That approach is one that cannot last,Economists have warned Reeves repeatedly against fine-tuning her fiscal plans against highly changeable forecasts,Like most forecasters, the OBR often gets things wrong, and always updates its view,Given the higher degree of uncertainty than normal, an even more cautious approach is warranted this time,As Prof Jagjit Chadha, the Cambridge University economist and former director of the National Institute of Economic and Social Research, told me: “Should you be driving a car with mechanical problems as fast as you’re trying to drive it? The answer is no.
”As she prepares for a high-stakes budget, Reeves could look to the Bank, her former employer, for guidance.Threadneedle Street has taken its fair share of flak over recent years for its communication.But, unusually, its message is currently spot-on.Andrew Bailey, the governor, has spoken of the need for a “gradual and careful” approach to cutting interest rates given the uncertain outlook and conflicting messages from official data sources.For Reeves, the trouble is that Britain has been through years of chaos and uncertainty, having been jolted through external shocks and self-inflicted wounds under a merry-go-round of incompetent Tory administrations.
After Labour’s promise of “change”, voters are impatient to see a turnaround.Waiting for a clearer economic picture to emerge is incompatible with the job of governing.To quell the summer of speculation the chancellor will need to start sending a few signals soon.
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