Two years ago, a British government rolled out a fiscal plan that rattled financial markets, drove up mortgage rates, torpedoed the pound and doomed the prime minister, Liz Truss, who would later resign after less than two months in office.
Nobody expects a repeat of that calamity when the new Labor government introduces its long-awaited budget on Wednesday. But the ill-fated Truss episode is a reminder of how treacherous budget announcements can be and of how high the political stakes can be for any new government.
That is especially true for Prime Minister Keir Starmer, whose government has gotten off to a turbulent start since his Labor Party won a landslide election victory in July. Starmer’s popularity has plummeted amid reports of internal strife and his acceptance of freebies from donors.
“It’s effectively like they’re relaunching the government,” said Steven Fielding, a political historian at the University of Nottingham. “This has to work as a media strategy, a political strategy, and above all, as an economic strategy.”
None of those three is easy, and it is a measure of the challenge facing Starmer that it is not even clear which is the hardest. Britain’s economic growth is sluggish, its public finances parlous, its Tory-leaning newspapers unforgiving, and its voters impatient after a cost-of-living crisis and 14 years of Conservative-led government, much of it marked by fiscal austerity.
Rachel Reeves, the finance minister who will present the budget, will try to navigate those crosscurrents with a package of measures that aims to recharge Britain’s long-term growth and restore its corroded public services, while at the same time not blowing out the deficit or raising basic taxes on working people — a core campaign pledge of the Labor Party.
Reeves, the chancellor of the Exchequer, has telegraphed other new taxes and a squeeze on some spending to head off the kind of market panic that greeted Truss’s proposals and to gird the public for what she and Starmer have warned will be a hard slog before the economy and public finances are back on solid ground.
“The risk is that they limit their ambitions so much to maintain fiscal credibility that they end up not delivering change that is credible enough for voters,” said Robert Ford, a professor of political science at the University of Manchester.
Reeves, who once worked as an economist at the Bank of England, stumbled out of the gate when she announced that subsidies to help with winter heating costs, which are currently given to all retirees, would be limited to the poorest. That provoked a backlash and came on top of Starmer’s regular warnings that things would get worse before they got better, which critics derided as “miserabilism.”
Like Starmer, Reeves is viewed as more of a technocrat than a retail politician. But the budget gives her a chance to show that she is more imaginative than her critics suggest, said Jill Rutter, a senior research fellow at UK in a Changing Europe, a think tank in London.
John McTernan, who was a senior aide to a former Labor prime minister, Tony Blair, said, “Labor hasn’t yet found a story to tell; the budget needs to color in that ‘white space.’ ” The question for Reeves and Starmer, he added, is whether “they shape the future or accept the constraints they inherited.”
Starmer has spent much of his first months in office lamenting the economic legacy left by his Conservative predecessor, Rishi Sunak. After the election, Reeves announced that she had discovered a “black hole” of 22 billion pounds, or $28.5 billion, in the budget, which would further constrain the government’s options.
But last week, Reeves said she would modify Britain’s debt rules to free up money for public works projects. She is also expected to announce higher mandatory contributions by employers to National Insurance, a payroll tax paid by workers and employers. The Conservatives and other critics say that amounts to a tax increase on working people because it will most likely come out of their wages.
With the Labor Party’s popularity falling, Reeves needs things to go smoothly. History shows that does not always happen.
“You can see how there’s a way through this,” said Jonathan Portes, a professor of economics and public policy at Kings College London. “They raise enough money from tax increases to patch up public services.”
Britain also faces a deeply uncertain global landscape, not least because of next week’s presidential election in the United States. If Donald Trump wins and “does half of what he says he’s going to do,” Professor Portes said, referring to Trump’s protectionist policies, “that’s going to be far more important than any of this.”
The New York Times
