Crack in Labor armor: Reeves’ October budget failed to rebuild foundations, says ALEX BRUMMER
You can understand why the Chancellor was content to let her disappointing Chancellor of the Exchequer, Darren Jones, take the hit in confidence in gilt-edged shares and the pound in the House of Commons.
If Rachel Reeves had chosen to appear before heading to Beijing, she might have been afraid to give in to the crisis narrative.
The reality is that her stewardship of the Treasury and Labour’s occupation of Downing Street is riddled with fundamental errors.
The wisdom of the Treasury has long been highly regarded in Whitehall, from where it presides over other government departments.
Recently, much of the experience, so crucial in times of market turmoil, has been lost.
Liz Truss’s decision to ax Tom Scholar, who helped steer the Labor government through the 2008-2009 financial crisis, was a fundamental mistake that left the Treasury exposed.
Budget flop: Rachel Reeves’ insistence on endless references to a £22bn black hole in the public finances dampened the bond market almost from day one
In the distant past, Labor governments have been helped by experienced fixers.
The names Harold Lever and Joel Barnett come to mind. During an LBC radio interview, former Cabinet Secretary Gus O’Donnell, known as ‘GOD’ at Westminster, argued that Number 10 needs ‘more intellectual weight and economic expertise’ to tackle the upcoming spending review or it will be ‘incredibly messy ‘ become.
Reeves started her position with a strong following wind. A lot of it disappeared very quickly.
Her insistence on endlessly referring to a £22 billion black hole in the public finances, which remains part of Jones’s narrative in the House of Commons, was a dampener on the bond market almost from day one.
The mess only got worse. The early passage in July of Labour’s Budget Responsibility Bill, intended as a response to Trussonomics, is a mistake.
Except in the event of an emergency (such as Covid-19), it requires the Office for Budget Responsibility (OBR) to provide a full assessment of any ‘fiscally significant’ event.
It means a major transfer of power and flexibility to an independent agency.
If the idea was to ensure that government policy would be trusted by the markets, this has failed due to the OBR imprimatur.
The underlying cause of the current confusion is that Reeves’ July 30 budget did nothing to repair the foundations.
As the Institute for Fiscal Studies notes, it left a “thin” margin to comply with its own fiscal rules.
The rise in bond yields, which have now reached a sixteen-and-a-half year high, has increased the cost of servicing government debt and wiped out room for maneuver.
It is now likely that the OBR expects higher borrowing in March, fueled by additional interest costs of around £8 billion, with £10 billion remaining.
Moreover, there could be a sharp decline in growth expectations as the economy came to a near standstill in the second half of last year.
The only thing that keeps this going is spending on public services, wasting money without productivity targets.
It’s too early to predict what will happen on March 26, when a standard OBR update is scheduled to arrive.
Decisions on government spending had to be postponed until June to allow more time for a ‘zero’ budget approach, which requires every department to go back to basics and justify all spending.
Even if markets were to correct the government spending cuts, another cut could be inevitable unless Reeves finds a way to back away from her promise to CBI leaders not to raise taxes after the £40 billion that has already disappeared from the pockets of businesses and consumers.
The big Labor drivers of growth, housing and infrastructure, a green energy revolution and business confidence will all be damaged by higher interest rates dramatically changing the economics of investment.
The Bank of England, which has suffered the burden of keeping interest rates low for too long and Russia’s war on Ukraine, may be reluctant to help.
If short-term interest rates were lowered, this could help bring down longer-term borrowing costs.
Governor Andrew Bailey, who accompanied the Chancellor to China, could have been a reassuring presence on Threadneedle Street at that moment. He is well trained in crisis management.
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