ALEX BRUMMER: ‘Repairing the foundations’ The budget has done nothing of the sort
The ‘fixing the foundations’ budget that Rachel Reeves tabled this week achieved nothing of the sort.
It has roiled the very bond markets that forced Liz Truss out of office, raised questions about whether the Bank of England will cut rates next week and drawn scorn from credit rating agencies Moody’s and S&P.
In a bid to calm the troubled waters, the Treasury’s chief financial secretary, Darren Jones, has been in the TV and radio studios. His deplorable performance, with references to Labour’s legacy of the invented £22 billion Tory black hole, showed naivety. The problem for the funders is no longer unfinished Tory business, but a left-wing, tax-increasing budget that has upset the city.
Reeves and the Treasury Department believed they could get away with changing budget rules to promote investment.
They were wrong on two counts. Firstly, the new debt rule – which takes into account assets such as Bank of England government bonds, student loans and government shares – is not trusted.
Wrong: Rachel Reeves and the Treasury Department believed they could get away with changing fiscal rules to spur investment
The value of such ‘assets’ rises and falls, and the further ahead one looks, the more likely it is that the scope for future investment will shrink.
Secondly, the big spending that Reeves outlines in the budget – on the NHS and schools – is slow and measuring the impact on productivity is difficult.
The NHS has been gobbling up public resources for years without noticeable improvements. It is unsatisfactory that children are taught in Portakabins due to structural problems in some buildings.
However, one of the unsung achievements of the Tory governments, largely to the credit of Michael Gove, has been the focus on science, technology, engineering and maths (STEM) subjects. It ensured that, despite the concreteness of the RAAC, Britain moved up the OECD education rankings.
Labour’s boasts about fixing Tory incompetence and repeated invocation of the Truss tantrum continue to haunt the government.
When the presidency took office on July 5, the economic reality was that bond markets were calm, production was going ‘gangbusters’ in the first months of the year (to quote the Office for National Statistics), inflation was back on track and that interest rates plummeted. .
None of that is true now. Bond yields have risen to near Liz Truss levels, the latest factory activity survey has fallen below 50 per cent, confidence in the UK budget has been wiped out and the cost of mortgage repayments is rising.
If Reeves and company were hoping for hosannas from the financial and business worlds for what turns out to have been an anti-business budget – which threw the fiscal underpinnings into disarray – they will be sorely disappointed.
What the Treasury team and the Tory top bench lack is real commercial experience and the presence of the kind of eminence grise adopted by previous Labor governments. Harold Lever and Joel Barnett were the great fixers for the Wilson and Callaghan governments in the 1960s and 1970s. Gordon Brown had Geoffrey Robinson at his elbow. As smart as Darren Jones is, it’s not quite the same.
Reeves’ change in budget rules and the impact of her national insurance surcharge on GPs, care homes and hospices has unraveled her budget with remarkable speed. Small farmers are furious. Thousands of wealth creators head to Milan, Dubai and elsewhere.
Most worrying must be the erosion of confidence in the money markets.
That’s really difficult to fix.
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