Introduction to the Budget Crisis
To say this wasn’t the plan is an understatement. When Rachel Reeves said she had no intention of targeting the British people with further tax rises, she meant it. But now, with the budget approaching, it’s not about whether taxes will go up, but about which taxes and by how much.
The Speculation
There is increasing speculation that the Chancellor will be forced to break her election promise not to increase income tax, social security, and VAT. The argument is that the current position is largely due to other people’s mistakes, particularly the mistakes of the Conservative Party. However, it is also true that a significant part of the likely deterioration in the fiscal position is due to the fact that the "trend growth rate" – the average speed of productivity growth – has fallen in recent years.
A Problem of Her Own Making
The Chancellor bears some responsibility for the current situation. Firstly, she established the budget rules that the Office for Budget Responsibility will violate. Secondly, she decided to give herself only a razor-thin amount of leeway against these rules. Thirdly, it is very likely that the Chancellor would have broken these budget rules even without the OBR productivity downgrade, as the government has made various U-turns on welfare reforms, winter fuel, and additional gifts for which it has not yet allocated funds.
The Uncertain Future
At this point, no one other than the Treasury and the Office for Budget Responsibility really knows how big the task is that the Chancellor faces. And in the coming weeks, those numbers could change significantly. But it is becoming increasingly clear, not least because of political signals, that the government will deliver bad news later this month.
The Unpopular Decision
In fact, despite everything this government has promised to end austerity, a combination of higher taxes and lower spending will be extremely unpopular and extremely controversial. And while the Chancellor will try to blame her predecessors, it remains to be seen whether the public will be fully convinced. The Chancellor’s decision will have significant consequences, and it will be a challenging time for the government to justify their actions to the public.
