If UK Chancellor of the Exchequer Rachel Reeves tried to meet all the political demands that have been placed on her, her budget would likely result in disappointing growth and financial instability. Instead, the new government’s first budget should be judged according to four longer-term criteria.
CAMBRIDGE – Here is an easy prediction: The budget that UK Chancellor of the Exchequer Rachel Reeves presents on October 30 will please almost no one. Yet the government’s first major fiscal initiative should not be judged on these terms, nor should those crafting the policy be assessed according to their ability to meet all the demands that have been placed on them. If they did that, the most likely results would be disappointing growth and financial instability.
Instead, this budget should be judged according to four criteria: the extent of its longer-term growth orientation; its approach to easing structural rigidities; the extent to which it simplifies an over-engineered fiscal framework; and whether these components are all properly communicated to the public. High scores across these four categories will bode well for both longer-term growth and genuine financial stability. Reeves can help bring to an end the United Kingdom’s prolonged period of under-investment, lagging productivity, crumbling public services, and worsening inequality of opportunity.
Let’s start with the bad news, though. Reeves inherited an unenviable brief. The UK’s fiscal position has been undermined by persistently large deficits, high debt, inadequate public services, considerable public-investment needs, and deep structural imbalances that hamper growth. This long list of problems not only increases the demands placed on the chancellor; it also severely reduces her operational flexibility, as do fiscal rules that her Labour Party further tightened during its election campaign.
The notion of a “first-best” budget in such circumstances is simply not feasible. Pushed by her fiscal inheritance deep into the second-best world, Reeves must ensure that the quest for some theoretical “best” does not get in the way of a more realistic “good.”
If all this were not daunting enough, UK policy formulation can also find itself haunted by the specter of Liz Truss, whose historically short-lived premiership ended abruptly when her own government’s proposed “mini-budget” triggered a damaging loss of confidence in financial markets. That episode, which featured the near-collapse of the UK pension system, left the government with higher borrowing costs and a lingering sense of financial fragility. The reaction is to tread very carefully, lest policymakers inadvertently trip over other significant vulnerabilities that are lurking beneath the surface.
Fortunately for Reeves (and the country), there is also good news. Prime Minister Keir Starmer’s government has articulated an economic-policy vision oriented around a “growth mission,” and it is now working diligently toward that goal. At a recent investment summit, officials did an admirable job of presenting compelling material, securing good attendance, and providing multiple points of contact for effective follow-ups. Having followed many such events over the years, I can attest that this one was a success.
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The government emerged from its summit with positive momentum, and financial markets appear to appreciate that a well-designed, pro-productivity budget will support longer-term growth, improved creditworthiness, and stronger debt sustainability. That momentum was reinforced by better-than-expected inflation numbers for September.
That said, the budget cannot possibly meet all reasonable demands – or even all those backed by intense political lobbying. These fall broadly into three categories: reducing the tax burden on businesses and households; providing more funding to highly rationed government departments that struggle to provide public services; and investing to modernize failing infrastructure and support tomorrow’s engines of growth.
Given the breadth and depth of these demands, the budget is sure to disappoint, and that will affect how some observers evaluate the success of the new government’s first major fiscal initiative. But a narrative of failure would be both unfortunate and misleading, especially given this government’s starting conditions.
A better approach would be to judge the budget by the four criteria above. First, we should consider whether it has a good chance of reducing anti-growth biases throughout the economy, and of enhancing productivity – either directly or through partnerships with the private sector. Second, we should also ask whether it represents a meaningful step toward reducing the structural imbalances that limit fiscal action.
Third, are individual measures accompanied by reforms to the fiscal framework that remove anti-investment biases (including the lack of sufficient differentiation among spending items that differ in their impact on future economic prosperity), eliminate arbitrary timelines, and modernize operational definitions pertaining to net government debt? And fourth, are the government’s proposals accompanied by an effective communication strategy that maintains the “growth-mission” anchor, establishes a multi-year horizon, and informs the market’s assessment of improved sovereign creditworthiness over the next few years?
Fortunately for the government, there are a variety of policy configurations that would meet these criteria, and several economists have already offered interesting proposals for how the UK can strengthen its outlook and enhance the design and effectiveness of its fiscal rules.
As for Budget Day itself, the important thing, given the long list of demands and unrealistic expectations, is to avoid jumping to the conclusion that Reeves has failed to deliver. Instead, one should look beyond the noise and consider whether the budget can serve as the operational catalyst for rebuilding the UK’s economic foundations. That is key to completing the country’s much-needed growth mission, but it will be a multiyear process.