Don’t expect rabbits, it will be a boffins’ Budget

There is no special Budget red box commissioned for Rachel Reeves when, mid-morning on Wednesday, she becomes the first woman to brandish one outside Number 11.

There will be no such frills, few jokes and don’t expect a big rabbit out of the hat.

The number crunchers, bean counters, and abacus economists, so derided by Liz Truss, have taken back control. In that reused Red Box will be a boffin’s Budget.

Indeed, it could be defined by being the polar opposite of everything in Truss and her chancellor Kwasi Kwarteng’s infamous mini-Budget two years ago.

They notoriously declined the offer of an Office of Budget Responsibility forecast, with Truss later deciding the forecaster was part of a “deep state” conspiracy against her premiership.

This time the OBR has carried out its full 10-week, back-and-forth audit of both the public finances and all the tax and spend policy measures, Reeves is planning, adding to what has felt like a drawn-out timetable of pre-Budget preparation.

The long three-month post-election wait has cast a cloud over consumer and business confidence, and so the economy too. Business leaders tell me they can cope with tax rises, but prolonged uncertainty is an economic mood-killer. Some think and opportunity was missed, after three years of rolling crises, to jump on a significant summer turning point, with a new stable government and with interest rates finally falling.

Still, the turning point could come now. This Budget forms part of a significant global economic pivot. The years of higher government spending and borrowing, alongside higher interest rates to dampen down rampant inflation, have given way to the opposite. Looser monetary policy, that is falling interest rates, and tighter fiscal policy, or higher taxes plus limits on borrowing, are the new normal.

In that Budget box are a wide range of tax rises. It might have been easier to list the ones that will not be going up. The most prominent, as I reported, will be the rise in employers’ National Insurance Contributions (NICs). I understand that Reeves was advised internally in July simply to reverse the “unfunded” 2% cut to employees’ National Insurance that was introduced by the Conservatives. But she was adamant she could not breach the election promise not to raise this form of NICs.

Of course there will be a fierce row over whether raising the employer NICs amounts to the same thing. Labour insiders point to a footnote on their election material that clarified the manifesto commitment only applied to employee NICs, and say they were attacked on this point in Conservative ads and speeches. That implies the words of the Labour manifesto were carefully crafted to allow for a rise in employer NICs.

Last week, at the International Monetary Fund meeting in Washington, I challenged the chancellor directly over why she had not been clearer with the electorate about potentially widespread tax rises, including National Insurance.

She told me there were three factors behind this tough Budget. She repeated her calculation of an inherited “£22bn black hole” – that she says she inherited from her predecessor but had not foreseen. She now says that deficit will continue “in future years”. She said the OBR would be publishing its review of how the overspend was “allowed to happen”, alongside the Budget. The Treasury sees this as an important sub-plot to Wednesday’s main Budget narrative.

Reeves also pointed to compensation payments for the infected blood and Horizon Post Office scandals which she said “the previous government did not put money in place for”.

Thirdly, the UK cannot continue on the path it is currently on when it comes to public spending, she told me, given the state of public services, such as prisons and the health service, and the new government’s promise that there “would not be a return to austerity”.

What we have heard so far about the Budget sounds rather austere, but the chancellor is defining austerity as real-terms cuts in government departments. It appears departments will get top-ups to cope with the rising cost of services.

The trade-offs in her Budget are driven by her new fiscal rules. A new rule governing borrowing to invest, the “investment rule” will replace the previous debt rule, allowing the reversal of a planned £20bn cut to spending on major capital projects. The new, broader measure of debt will have to fall in five years’ time. But it is the new “stability rule” that will be the binding constraint for Wednesday. All day-to-say spending in departments, on welfare and on debt interest, will have to be funded by tax revenue over a certain, as yet unspecified, timeframe. This could be a really quite fierce rule, far tougher than the Conservatives’ rule. Borrowing will only be for investment.

These two rules together will frame not just this Budget, but the next half decade, affecting every penny that the government spends. Labour has calculated that its landslide majority is rooted in a public desire to sort out underperforming public services, such as the NHS, and a decline in the quality of the public realm, from transport to town centres to housing. The real “black hole” in this view is in public services. The “fiscal fiction” of unrealistic spending plans will become fiscal fact.

By mandating that the spending gaps will be filled by significant tax rises, the strategy here is to communicate overwhelming political pain tolerance to markets that lend money to the exchequer. Essentially a massive majority will be used to credibly guarantee surpluses on “current” spending. Some taxes will go up, but the return is that it should help keep interest rates down for households, businesses and government itself.

As one prominent central banker told the margins of the IMF meeting, what is important in terms of market credibility is not just the amount of borrowing, but the coherence of the story and the strategy around that borrowing.

A new chancellor needs to establish their financial credibility, after all, credibility is famously hard to gain and much easier to lose. That is the purpose of these self-imposed rules. But in recent years chancellors have also struggled with political credibility. More than one were in the job for too short a time to even have an official Budget. It has not been an absolute given that all Budget measures will actually be enacted by a rebellious and unruly governing party. Over the Channel that is precisely the problem in France, where Reeves’ counterpart Antoine Armand has to convince he can actually pass tough measures as a minority government. Rachel Reeves has no such problems.

Indeed, at an event in Washington addressing bankers, congressmen and senators at the British ambassador’s residence, the chancellor had a moment for reflection. Exactly two years before, Kwarteng had made this same address, amid widespread mini-Budget turmoil, including jokes about his shared role with Isaac Newton, who had solved a historic sterling crisis. As a result of the aftermath of Kwarteng’s “fiscal event”, board members of British clearing banks were having to reassure their counterparties that Britain was “ok”. Developing country finance ministers were making the same half-joke about Britain, the old master, now being the crisis economy.

For a chancellor who, two decades ago, was seconded to the British embassy as an economist, during one of Argentina’s debt crises, it was an anathema.

It is why on Thursday morning she and her team are expecting some anger from wealthier taxpayers and bad headlines in certain newspapers. But the flip-side will be relief for hard-pressed users of many public services, and especially what the Treasury hopes will be tranquil financial markets as she embarks on a long-term programme of long-delayed investments in Britain’s economic future.

It is a Budget that will be unpacked and unpicked for months, perhaps years to come.