The ‘fixing the foundations’ Budget delivered by Rachel Reeves this week has done nothing of the kind.
It has unsettled the very bond markets which forced Liz Truss from office, raised questions as to whether the Bank of England will lower interest rates next week and has been disdainfully received by credit rating agencies Moody’s and S&P.
In an effort to calm troubled waters, the chief financial secretary to the Treasury Darren Jones has been in the TV and radio studios. His lamentable performance, with references to Labour’s inheritance of the confected £22billion Tory black hole, showed naivety. The issue for financiers is no longer unfinished Tory business but a Leftish, tax-raising Budget which has unsettled the City.
Reeves and the Treasury believed that they could get away with changing the fiscal rules so as to foster investment.
They were wrong on two counts. Firstly, the new debt rule – which takes into account assets such as the Bank of England’s holdings of gilts, student loans and government shareholdings – is not trusted.
The value of such ‘assets’ rises and falls and the further one looks ahead the more likely it is that the headroom for future investment shrinks.
Secondly, the big spends Reeves outlined in the Budget – on the NHS and schools – are slow burners and measuring the impact on productivity is tricky.
The NHS has been gobbling up public resources for years without noticeable improvements. It is unsatisfactory for kids to be instructed in Portakabins because of structural problems in some buildings.
However, one of the unsung achievements of the Tory governments, largely to the credit of Michael Gove, was the focus on science, technology, engineering and mathematics (STEM) subjects. It sent Britain soaring up the OECD education score sheet in spite of RAAC concrete.
Labour’s swagger about repairing Tory incompetence and its repeated invocation of the Truss tantrum is coming back to haunt the Government.
When it took office on July 5, the economic reality was that bond markets were calm, output in the early months of the year was going ‘gangbusters’ (to quote the Office for National Statistics), inflation was back on target and interest rates tumbling.
None of that is now true. Bond rates have climbed close to Liz Truss levels, the latest survey of factory activity has dropped below 50 per cent, confidence in the UK’s fiscal stance has been erased and the cost of mortgage fixes is rising.
If Reeves and company were hoping for hosannas from the finance and business community, for what turns out to have been an anti-enterprise Budget – which muddled the fiscal underpinnings – they will be greatly disappointed.
Missing from the Treasury team and Tory front bench is real commercial experience and the presence of the kind of eminence grise adopted by previous Labour governments. Harold Lever and Joel Barnett were the great fixers for the Wilson and Callaghan administrations of the 60s and 70s. Gordon Brown had Geoffrey Robinson at his elbow. As smart as Darren Jones may be, it is not quite the same.
Reeves’s change to the fiscal rules and the impact of her national insurance surcharge on GPs, care homes and hospices has unravelled her budget with remarkable speed. Small farmers are seething. Thousands of wealth creators are heading to Milan, Dubai and elsewhere.
Of most concern must be the erosion of confidence in the money markets.
That is really difficult to repair.
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