Reeves could fix the economy but her own party stands in the way

Currying favour with Labour MPs and backbenchers limits the Chancellor’s options Daily Telegraph 24/11/25 link Perhaps there is some merit in moving the main Budget event from its traditional slot in March to this week. Coming just before Christmas, there is the opportunity for the Chancellor to distribute some early seasonal gifts.

Yet this year she is going to be dishing out next to nothing, apart from the already announced rescinding of some proposed cuts in welfare spending and possibly more cash for the NHS. But she appears to have been the recipient of an early Christmas gift herself. If the leaks are to be believed, when the Office for Budget Responsibility (OBR) reassessed the fiscal prospects, it came up with a rather less alarming number for the size of the required fiscal adjustment, aka the “black hole”. Last Friday’s poor borrowing figures will not affect this judgement. We don’t yet know what the figure is but it seems likely to be something like £20bn-30bn rather than the £40bn that was talked about until recently. By now you know the likely measures: a further freeze on personal tax allowances, an increase in council tax and/or the introduction of some sort of “mansion tax”, a restriction of the tax deductibility of pension contributions, and/or a reduction in the tax-free lump sum on pensions, a tightening of the conditions governing inheritance tax, and a possible further assault on capital gains. How would such a package go down? There has recently been such alarm among high-taxpayers that they might give a sigh of relief. But that wouldn’t mean that the Budget was widely perceived as a success. Budgets are a peculiar mixture of technical details on the one hand and pure theatre on the other. Chancellors always have to please three distinct audiences: their own MPs, the voters and the financial markets. This year it seems that the MPs have exercised the dominant influence, obliging her to rescind planned welfare cuts and opposing any manifesto-busting increases in income tax rates. Being this far away from the next general election (theoretically, at least), the voters are not yet of key concern – although the prospect of the local and Welsh elections next May concentrates the mind. Given that Labour MPs have apparently already had their due from the Chancellor, much of the focus of the Budget will be on the reaction in the bond markets. They will want to see tough measures implemented, with the pain to be suffered soon rather than deferred into the outyears, when it may never actually materialise. In that regard, they would probably be more impressed if the Chancellor did announce an increase in income tax rates. But they will take some comfort from any fiscal tightening, and the larger the better. This would both improve the fiscal position and depress aggregate demand, thereby helping inflation to fall back. As it is, there is a chance that the Budget measures will include a reduction to zero of the rate of VAT on domestic utility usage. This would have the effect of bringing down the CPI inflation rate, for a year at least, by about 0.2pc. Accordingly, there is a good chance that the markets will respond to the Budget by reducing interest rate expectations over the next year and by cutting gilt yields somewhat, thereby easing back slightly the rate at which the Government can borrow. Admittedly, this would hardly be a bonanza but she should be grateful for small mercies. Bonanzas will only be forthcoming from stronger economic growth. Right from the beginning, the Chancellor made it clear that boosting the economic growth rate was her top priority. As it happens, apart from increasing public investment and relaxing planning restrictions, she has done the exact opposite. Moreover, it is as though the Government’s assumption when it took office was that the dreaded Tories were so awful that just having a non-Tory government would transform matters. Sadly, it is more difficult than that. Anything the Chancellor can do now to improve the supply-side of the economy would be welcome. The trouble is that all the available big measures are blocked by opposition within the Labour Party – including a crackdown on welfare and a radical postponement of the net zero objective. Doubtless, she will try to curry favour with Labour MPs and party members by again clobbering the so-called rich, this time including millions of people you would normally term middle-class. Actually, despite any money that might theoretically be raised, the financial markets won’t be pleased with this – and not for selfish reasons. They are well aware that the UK’s tax base is extraordinarily narrow, with comparatively few people responsible for paying a huge proportion of the tax collected. They know that a further exodus of high-earning and high-tax-paying individuals will damage both revenue prospects and the supply side of the economy. Last year the Chancellor said that she wouldn’t be back for more. And yet here we are. Could she be back for yet more next time? The scary thing is that the public finances are in such a grim state without there being a war, and without even much of the much-heralded boost to defence spending. Nor is the economy in a recession. Yet. The public finances are so grim simply because of the Government’s failure to control public spending. But even if the next Budget were to require yet higher taxes, it would be unlikely Rachel Reeves would do the deed. Speculation is rife that her days are numbered. Ditto for the Prime Minister. It is tempting to assume that if they were to be ousted, it wouldn’t really matter. The deep crisis in which the UK finds itself goes well beyond mere personalities. Still, it would be wise to heed the closing words of one of Hilaire Belloc’s poems: “And always keep a-hold of Nurse / For fear of finding something worse.” Roger Bootle is senior independent adviser to Capital Economics and a senior fellow at Policy Exchange.