On fiscal policy, Rachel Reeves should show, not tell.

Spread the love

Open the editor’s digest for free

The UK government was up to something compelling. As borrowing costs have risen since the autumn, the likelihood of meeting the key self-sustaining fiscal rule – to invest by the end of the decade – is shrinking. The decline was evident from the government’s high-profile speeches. Whether it was Prime Minister Sir Keir Starmer, Rachel Reeves, the Chancellor, or their spokespeople, adjectives describing the fiscal policy tended to alternate between “ironclad” and “non-negotiable”. Their attitude is always “absolutely committed”.

Sentiment improved in UK government bond markets last week, but many remain unconvinced. Billionaire Ray Dalio, the founder of hedge fund firm Bridgewater Associates, is less impressed, saying gilts are headed for a “death spiral.” Of course, this was overstated, but the comments reflect a wider concern in financial markets that there is a gap between tough fiscal talk and the reality of UK budget policy – and it goes well ahead of the current Labor government.

What is needed to provide the fiscal stability on which the rest of the UK economy will build is simple. No more talks. No more tight fiscal policy announcements now or for some time to come. Instead, Reeves will have to implement the tax hikes and spending plans announced in October without any compromises when they take effect in April.

These are sized. Along with large and chaotic increases in Employers’ National Insurance, income tax increases have been accompanied by frozen benefits and huge increases in government spending. Together, they are steps It is prepared to reduce Government loans in a big way. The overall deficit is projected to come down to 3.6 percent in 2025-26 from 4.5 percent in 2024-25, while the current fiscal deficit, excluding capital investment, has halved to 0.9 percent of GDP from 2 percent. In the same period.

This will be an exercise in show, not talk. It is rare for the UK government to reduce the debt to this extent – it will be clear in the summer that Reeves and her policies are on the right track. Success immediately marks the difference between the UK’s fiscal policy and that of similar countries.

In recent years, US administrations have shown little ability to run deficits below 6 percent of GDP. And there is no improvement in sight.. The European Commission expects France to have a budget deficit. It exceeded 6 percent of the total domestic product Last year there was little hope of a political consensus to deliver many reforms. Public finances in Germany are strong, but the economy is weak. And the level of debt in the UK, although high, is still much lower than in Italy.

Bond markets often have a mind of their own, but it’s hard to single out the UK as the one sizeable advanced country with the ability to legislate and see through fiscal consolidation. This is what Reeves should do. If growth were to suffer, the Bank of England would be in a strong position to ease monetary policy and offset fiscal tightening.

There is no guarantee that the financial markets have much to lose if they bet against you. The UK government should be hoping that consumers start to spend their latest real incomes and improve their growth. Any expansion must be shown to come with some recovery in productivity growth. And the increase in Employers’ National Insurance should not have a more detrimental effect on employment and prices than previously expected.

There is no further talk of a non-negotiable commitment to iron-clad fiscal rules.

chris.giles@ft.com