Prepare for a budget U-turn as the squeeze on UK finances prompts talk of changing the fiscal rules: ALEX BRUMMER
Rachel Reeves, who vowed to end Tory fiscal chaos with one financial statement a year, is now on her third.
She started in July last year when the Chancellor discovered a £22billion black hole in the Government accounts and started to close it by axing the winter fuel allowance for pensioners, as well as cutting science funding in Edinburgh and Tory road schemes.
This was followed by the change to fiscal rules in her October 2024 budget. This necessitated the £40billion hammer blow of increased taxes, a dump of resources to an unreformed NHS and enhanced powers for a misfiring Office for Budget Responsibility (OBR).
Next came March’s Spring Statement which sought to restore vanished fiscal headroom by taking a kitchen knife to welfare payments – to restore that headroom to a feeble £9.9billion.
We should now prepare for package number four, in addition to the July public spending settlement already in the diary.
Donald Trump’s global trade war has dramatically shifted the dial. Britain is far from being off the hook because our general tariff came in at a moderate 10 per cent.
Pressure: Chancellor Rachel Reeves (pictured), who vowed to end Tory fiscal chaos with one financial statement a year, is now on her third
That was encouraging, except two important goods exporting industries – motor cars, worth £8.3billion over the most recent 12 months, and speciality steels – face a full 25 per cent barrier.
Jaguar Land Rover was so stunned that it has halted all exports to its biggest market. So much for the theory that rich people don’t care what they pay to have a Range Rover on the driveway.
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Reports from Westminster suggest the Government is ready to unveil a new industrial strategy to deal with Trump measures and to preserve UK manufacturing. Sir Keir Starmer acted when he eased down on the rush to electric vehicles (EVs).
There is less to this than meets the eye because the 2030 target to sell nothing but EVs is intact. A further shift may yet be necessary.
A different approach is needed in the steel negotiations with Tata at Port Talbot and China’s Jingye at Scunthorpe.
Current proposals seek a replacement of existing blast furnaces, making virgin specialist steels, by electric arc furnaces.
The American tariffs have underlined why Britain, for national security purposes, needs a degree of self-sufficiency in steel production. If that means paying to keep blast furnaces open, while conversion to electric arc furnaces takes place, so be it.
The need for the UK to be ever more self-sufficient also makes the case for the Prime Minister to change his mind on start-up funds for AstraZeneca’s now-abandoned £450million vaccine plant in Liverpool.
Unless Starmer and Reeves come up with effective support plans for industry, as the Tories did in the pandemic, the risk of ever more deindustrialisation will grow.
The big question for Reeves is how to pay for all of this and perhaps a ‘tariff’ loan programme, like that run through the British Business Bank in the pandemic.
The fiscal headroom restored last month is vanishing before our eyes. Cuts in the UK growth forecast, made by City economists since the Spring Statement on March 26, suggest the wiggle room already has vanished. There might be some relief from lower-than-projected bond rates.
The lack of budgetary space has necessitated talk in Whitehall of weakening the OBR mandate or an emergency change in the fiscal rules. That would represent one of the swiftest of the many U-turns in British financial history.
Brains trust
A fascinating fallout from Trumponomics is the effort of commentators to seek an intellectual rationale for his tariff war.
I am as guilty as everyone else suggesting his detox rationale derives from the pre-war Austrian school.
FT columnist Gillian Tett cites the work of German Jewish economist Albert Hirschman and his 1945 work National Power And The Structure Of Economic Trade.
There is a litany of historic experts quoted to deride Trump policy. They include Cambridge’s finest, John Maynard Keynes, and Chicago’s Milton Friedman who both agreed on the false gods of trade barriers, but nothing else.
When in trouble I turn to MIT’s Charles Kindleberger who wrote the university textbook on international economics.
His The World In Depression 1929-1939 demands that crises be met head on with interest rate cuts. Why are central banks waiting?
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