‘It’s not my fault’ says Rachel Reeves

In her speech on Tuesday, the Chancellor strongly hinted that the Budget will be painful, not because of what she’s done but because of the actions of others. She then claimed that the pain to come will be worth it, to tackle the country’s debt mountain, help public services and promote growth.

Who did she blame?

There was quite a list, starting with the Brexit vote (9 years ago), the short-lived Liz Truss premiership (3 years ago), the Conservative party, Trumps’s tariffs, austerity, lack of investment by UK businesses, the greedy bond market for charging UK plc too much on our debts and apparently even ‘the world’ is against her. The litany of blame went on and on, but at no point did she attribute any blame to herself or rebellious backbenchers in her own party who effectively torpedoed her last budget.

Business confidence

There is no doubt that the current state of economic confidence in the UK is gloomy and it’s not just in the business community, a recent YouGov poll showed that a majority of the general public expect to be worse off in twelve months’ time.

Businesses are even more pessimistic than the general public, with the latest figures from the Institute of Directors’ Economic Confidence Index ranking the outlook among business leaders at -73. This negative outlook reflects real concerns about the economy, which will have a concrete impact on everyone.

When businesses and investors lack confidence, the knock-on effect is reduced or cancelled spending decisions, delayed hiring and/or a reduced workforce as evidenced by the latest ONS figures, which show that payrolled employees fell by over 100,000 in the last year. Even the Institute for Fiscal Studies expects this trend to continue and have predicted a rise in unemployment approaching 6% next year.

A vicious circle

With many consumers worried about. costs, many will instead opt to increase their savings, further fuelling the negative feeling in the country. As a result here’ll be even less spending by the public, especially with the spectre of rising unemployment. The vicious circle will then further tighten with the public, investors and employers hunkering down to survive the expected downturn, and on and on the cycle will go.

Whilst everyone accepts that Dear Rachel must make the books add up, she is not an innocent party buffeted by events completely outside of her control. She is the Chancellor and as such is responsible for setting the tone of the fiscal framework that directly affects the confidence of the market.

What can the Chancellor do?

I accept that she won’t be able to fix the country’s fiscal problems overnight, but she has hamstrung herself by choosing to make a rod for her own back by overpromising in the general election campaign and combined this with a self-imposed straitjacket by completely ruling out tax rises on ‘working people’.

A year ago, she frightened everyone by going into overdrive with doom and gloom predictions, especially on the size of the Treasury’s fiscal black hole. She sought to reassure us that she had matters in hand, because the Labour Party, with its huge majority, would be able to implement much needed change.

On top of her major hike in employers’ National Insurance costs, her plan was to implement some modest tax rises on the general public, such as withdrawing the Winter Fuel Allowance (WFA), a rise in some of the Capital Gains Tax rates and combine this with a significant reduction in government spending, principally from the bloated welfare budget.

Torpedoed by her own backbenchers

Her plan to raise billions by reducing welfare spending was immediately torpedoed by backbenchers in her own party, who not only forced a U-turn on this and the WFA, but to make matters worse, they also extracted an undertaking from the Chancellor, to end the two-child benefit cap.

A reduction in welfare spending was meant to be the start, but because of the rebellion, her austerity plans now appear to fall entirely on the private sector. The damage caused by the huge rise in employers’ costs will be exacerbated by the costly additions to employment regulation, despite all the problems in the jobs market, accentuating businesses’ caution about spending and investment decisions.

In the meantime, her fiscal black hole has grown to an estimated £40bn and whilst Dear Rachel has provided a list of who is to blame, she has not come up with a magic bullet to solve her problem. So, we now find ourselves in a toxic environment for economic confidence. Everybody knows that she is going to put up taxes in the Budget, but which of the long list of possible tax rises will she choose?

Are we unwilling participants in a horror film?

Whilst Dear Rachel has developed an unfortunate habit of shooting herself in the foot, perhaps her biggest own goal is by stoking both the public and business fears of tax rises, that fear is economically damaging. To make matters worse, Dear Reeves has chosen to drag it out far longer than normal by scheduling the Budget a full month later than last year.

So, for the next three weeks we will be in a scenario similar to being unwilling participants in a horror movie, where we are tortured by the anticipation of knowing that heavy blows are soon to rain down but not knowing where they will land. The Chancellor’s decision to make us wait until late November for Budget Day is only dragging out that agony, whilst confidence falls and the economic pain mounts.

In the meantime, the cost of living is still rising, the public is hunkering down and not spending, worried business leaders are shelving their plans and international investors are moving their money abroad.

Accountant’s view

At our practice, we have been inundated recently with questions from worried business clients and taxpayers. In a normal year, we would have a reasonably clear idea of what’s likely to come and be able to advise accordingly, this year however we find ourselves hiding in the same storm shelter as everybody else!