Reeves’ Say-Nothing Moment Left Britain’s Big Challenges Unanswered

Rachel Reeves had promised to deliver a nothing-to-see-here spring forecast this week, an event to be celebrated for its uneventfulness. After war erupted in the Middle East, however, Tuesday’s statement was more striking for what the UK’s Chancellor of the Exchequer failed to say.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Rachel Reeves had promised to deliver a nothing-to-see-here spring forecast this week, an event to be celebrated for its uneventfulness. After war erupted in the Middle East, however, Tuesday’s statement was more striking for what the UK’s Chancellor of the Exchequer failed to say.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.The conflict with Iran cleaves together two of the biggest challenges facing Britain: defense and energy. The government promises to deliver more ships, troops and armaments — just not today. Energy prices have soared, threatening to undermine the entire forecast that Reeves announced to parliament — but she included no plan B.“What was more important was what we didn’t hear,” said David Aikman, director of the National Institute of Economic and Social Research. “Particularly, in light of the conflict in the Middle East. How are we going to pay for materially higher defense spending and what are we going to do to bring down energy costs for households and businesses?” Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.In an interview later with Bloomberg’s Stephanie Flanders, Reeves said Labour would “do everything in our power to protect businesses and and families.” But she provided no detail. Similarly, Reeves had told parliament she was “proud to be the chancellor that is delivering the biggest uplift in defense spending since the Cold War,” with no explanation of how to get there.It took her watchdog, the Office for Budget Responsibility, to provide a sense of scale. Meeting the Labour government’s commitment to raise defense spending to 3.5% of GDP by 2035 would “cost around an additional £40 billion ($53.3 billion) in today’s money,” it said.On energy, Reeves said “it is incumbent on me and on this government to chart a course through” the uncertainty caused by the conflict “to secure our economy against shocks.” She did not say how support would be provided or address the the UK’s crippling 63% industrial energy price premium above the International Energy Agency average.The OBR again provided context. The war “could have very significant impacts on the global economy, particularly energy markets,” it said. An energy shock scenario from 2024 that it referenced on Tuesday concluded that higher inflation and interest rates “could cause a year-long recession.”Reeves said her decision in November to take £150 off the average household bill now looks particularly important, but political opponents to the left of Labour are already pushing for more.

The Trades Union Congress responded that she needs to “stand ready to pull every lever to shield households and firms from further global shocks,” while the Green Party — which has shot above Labour in the polls — called on Reeves to abandon her fiscal rules.“If overnight increases to oil and gas prices are sustained, we could see inflation back at three per cent by the summer with typical energy bills £500 higher,” said Ruth Curtice, head of the Resolution Foundation think tank.‘Blissfully little speculation’Aside from the Iran conflict, the OBR’s forecast painted an otherwise improved picture. After £66 billion in tax rises across her first three fiscal events, markets and businesses welcome the outbreak of policy calm. “There was blissfully little speculation about potential policy changes in the lead up, and no tweaking tax or spending policies on the day,” said Helen Miller, director of the Institute for Fiscal Studies. Reeves stuck to her commitment to a single fiscal event in the autumn and increased the headroom against both her fiscal rules. She met her key mandate that taxes must cover day-to-day borrowing in 2029-30 with £23.6 billion to spare and her supplementary rule by £27.1 billion.Borrowing was £17.6 billion lower across the six years of the forecast, driven by higher tax receipts thanks to a bounce in stock markets and slightly lower debt interest costs. Those offset the £4.3 billion annual cost of policy measures taken since last November’s budget — on special educational needs, rejoining Europe’s student Erasmus program and partial U-turns on taxes applied to farmers and pubs.GDP is expected to be very slightly weaker, the OBR said — revising down growth this year to 1.1% from 1.4% and up to 1.6% from 1.5% in 2028. Unemployment is now forecast to peak higher at 5.3% this year then falls back to 4.2% by the end of the decade. Inflation is at the 2% target from 2027. The benign outlook was immediately called into question by the Middle East conflict, however. “If the crisis persists, higher energy prices will feed through to inflation, increasing borrowing costs further, putting serious pressure on the fiscal outlook,” said Aikman. The OBR said an energy shock that drives unemployment to 7% would push borrowing “£20 billion a year higher than our central forecast.” Rising market borrowing costs may eat into her headroom once again.Even beyond the Iran war, “there are clear strains and demands on policy coming down the road,” Miller said. Reeves’ silence on those policy pressures left a lot of questions unanswered.The chancellor is due to reverse a 5 pence cut in fuel duty between September and April, then increase it in line with inflation next year.

The Fair Fuel campaign group said the 18% increase in oil prices above the OBR’s assumption will add 5-10 pence to a liter of petrol and the chancellor should not make motorists’ lives harder. “At the very least keep it frozen for the lifetime of this parliament,” it said.Tariffs and Tax HikesOther risks lurk, posing a potential threat in the autumn. The OBR forecasts don’t reflect changes in US tariffs following the US Supreme Court ruling. Nor did she address the student loan reforms that Prime Minister Keir Starmer has made clear are coming. Miller said threats to the outlook may have just been kicked forward to the next autumn budget, with some “major OBR forecasting judgements” to be made on migration and wage growth over the coming months.The OBR did lower its annual migration estimate by 50,000, to reflect an increase in the number of Britons emigrating, which explained the OBR’s slightly weaker overall growth outlook. But a bigger anticipated downward revision to immigration to the UK from abroad, expected in the autumn, will hit harder. Reeves has a £23.6 billion buffer “but that could be swamped by events in the Middle East,” said Capital Economics. Reeves managed to keep her spring forecast policy-free, the consultancy added, but the consequences of war in Iran and domestic spending pressures could once again “point to more tax hikes.”Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.