Could Rachel Reeves’s budget ‘jiggery-pokery’ scare investors?
Budgets are all about numbers.
In the coming 24 hours, we’ll be engulfed with all sorts of figures – about the state of the economy, about the size of the deficit, about the fiscal rules the new chancellor is planning to introduce in the coming months.
But in fact most budgets, this one included, can really be boiled down to the difference between two big numbers.
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Total government spending and total government receipts.
Right now the UK government is spending just over £1.2trn a year and bringing in just over £1.1trn in taxes and receipts.
In other words, this country is spending more than it generates in tax receipts.
So it has to borrow the difference.
That borrowing, also known as the deficit, is (as you’ve already probably worked out from the above numbers) around £100bn a year.
And politicians, including the chancellor, spend rather a lot of time fretting about the deficit.
Indeed, the main objective of the various different fiscal rules they’ve imposed on themselves in recent decades has been to narrow the gap between those two big numbers.
Broadly speaking, the easiest way to do this is to cut something few people notice in the short run – government investment.
When he came into office in 2010, George Osborne cut a lot of parts of public spending, but he absolutely slashed the amount the public sector spent on buildings, infrastructure and machinery – capital spending.
Having lifted the total briefly after the pandemic, Jeremy Hunt was planning a similar fall in investment in the coming years.
Rachel Reeves has said repeatedly ahead of the budget that she plans to invest far more in the coming years.
This is a noble goal, given investment tends to benefit future generations, however, it will not be cheap in the short run.
Indeed, keeping investment spending at current levels will cost roughly £30bn a year by the end of this decade.
So how does the chancellor square that with her fiscal rules?
Well, one part of the answer is that she’s planning to increase the revenues coming into the Exchequer, reportedly via higher national insurance charges for insurers.
But the other part of the answer is that she’s changing her fiscal rules as well.
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The long and the short of it is that Ms Reeves looks likely to choose a set of fiscal rules that ignore investment spending.
Both her updated debt rule and her current budget rule essentially omit capital spending – although they include debt interest costs, so she can’t just borrow willy-nilly.
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That might sound like fiscal jiggery-pokery, and some in the market fret that investors will soon take fright as a result.
Indeed, some suggest they already are, and point to the fact the UK’s cost of government borrowing – as measured by the benchmark 10-year bond yield – has risen from under 4% to nearly 4.3% in the past month alone.
However, this is a slight misreading of this market, which is as affected by global economic factors and central bank action as much as by UK budgetary policy.
Indeed, compare the recent changes in the UK’s borrowing rates with those in Germany and the US and British government bond yields are close to where they usually trade in the run up to a budget.
And they are far, far below where they were in the run-up to Liz Truss’s mini-budget.
Even so, there are bound to be a few unexpected surprises and some relevant new data points in this fiscal event.
It is a budget after all.
Ford’s UK boss has called on the government to provide consumer incentives of up to £5,000 per car to boost demand for electric vehicles and help the industry hit challenging climate targets.
Lisa Brankin, chair of Ford UK & Ireland, told Sky News that direct support for consumers to purchase zero-emission vehicles is crucial if the industry is to remain viable and hit challenging net zero milestones.
Last week, amid increased industry pressure, the government launched a “fast-track” review of its Zero Emission Mandate (ZEV), which sets targets for the proportion of new vehicles that must be electric – set at 22% this year for cars and 10% for vans.
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Manufacturers say those targets are unrealistic, and a £15,000 fine per non-compliant vehicle is too harsh. Vauxhall owner Stellantis cited the ZEV as a factor in the closure of its Luton plant announced last week.
Speaking at Ford‘s Halewood plant on Merseyside at the launch of the Puma Gen-E, the electric version of its best-selling small SUV, Ms Brankin said consumer demand has fallen far below that envisaged when the mandate was set.
“The mandate is a really aggressive trajectory to 2030 and the phase out of new petrol and diesel vehicles. For us to get a return on our investment as a manufacturer – we have spent £380m here [at Halewood] and £2bn in Cologne – we need and want to sell electric vehicles. The problem is customers are not moving as we would want.
The electric van and Puma use the power unit produced on Merseyside. Pic: Ford
“The number one thing we want is direct customer incentives, perhaps a scrappage scheme, we have been calling for a cut in VAT on electric vehicles. Something that will incentivise customers to buy EVs, and incentivise the van and car sales that we badly need in the UK.”
Asked if the incentives would need to be in the order of £2,000-£5,000 to be effective, she said: “That is a good question, but it would need to be in that region. It will need to be substantial.”
The Puma Gen-E is significant for Ford because it is the company’s smallest and cheapest EV, with a starting price of just under £30,000, bringing it closer to mass market reach than its existing models.
The Halewood plant has just begun making the Gen-E power unit, used in both the Puma and the E-Transit Custom, the electric version of Ford’s 60-year-old commercial vehicle. They say it will now power Britain’s best-selling car and van.
It comes as the entire European car industry faces challenges in the transition away from internal combustion, including softening consumer demand, stiff Chinese competition and the threat of tariffs from the incoming second Trump administration.
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Ms Brankin defended Ford’s move into electric vehicles, a transition that thus far has failed to replicate its former dominance of the UK market for petrol and diesel vehicles.
She also said state support for its UK plants at Dagenham in Essex and Halewood was dwarfed by the company’s investment.
“The support we’ve had from the government is still far below the amount that we’ve poured into our business to make the EV transition. And for us to have a sustainable business it’s important that it’s profitable for us going forward if we are going to protect the jobs we’ve already created.
“We have got a really good range of electric vehicles, we are just not seeing customers making the switch as fast as we would want them to.”
The Office for National Statistics (ONS) has admitted efforts to overhaul unreliable data on Britain’s jobs market may not be ready until 2027.
The ONS confirmed it is now “unlikely” it will be able to introduce a revamped version of its Labour Force Survey (LFS) – which is the official measure of employment and unemployment in the UK – by mid-2025, leaving policymakers in the dark over the true state of the UK workforce.
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Governor of the Bank Andrew Bailey said it was “a substantial problem” that the exact numbers of people at work are unknown in part due to fewer people answering the phone when the ONS call.
While the labour market is going to be “the key” to future rate cuts, another member of the interest rate decider Professor Alan Taylor told the MPs of the Treasury Committee last month: “We don’t necessarily have the best statistics there.”
The government too has built policy around the belief that the UK has a high number of people out of work and not looking for work.
Just last week the government announced £240m for reforms to “get Britain working”.
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But on the same day, the Bank’s chief economist said labour force participation “has now reached the point where participation is broadly in line with a natural level it should be”.
The UK had been thought to be an outlier compared to its neighbours in that the number of people in work is lower than before the COVID-19 pandemic.
Respected thinktank the Resolution Foundation had also said that there was no rise in inactivity based on HM Revenue & Customs data and that employment had been underestimated by 930,000 since 2019.
Also revised due to changes in population is the employment estimate, which is 0.1% higher than first thought, the ONS said.
The ONS said it continued “to advise caution when interpreting changes” in things like unemployment and economic inactivity.
More than a year ago in October 2023, the ONS temporarily suspended publication of its official labour force survey due to low response rates after the pandemic and began releasing experimental estimates that relied on tax and other data sources.
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