Nothing has changed – and that is exactly Rachel Reeves’ problem.
This morning’s GDP figure suggested that the economy shrank imperceptibly in the month to July, by 0.044 per cent – which, to the nearest tenth of one per cent, is zero. And that was the official number published by the Office for National Statistics. This accident of rounding gives us a true picture, which is that of zero growth.
We cannot tell much from one month’s statistics, which bobble up and down before being revised, but the longer view tells us that the economy is bumping along, growing slowly, better than Germany and France and enough to keep us out of recession. But still slower than the average of the G7 countries, let alone Labour’s absurd target of the fastest growth in the G7.
The chancellor is running out of time before the autumn Budget. She set the date for as late as she could, on 26 November, in the hope that something would turn up. Instead, all she did was to allow a few more weeks of news stories speculating about tax rises, and “your money” features in the newspapers advising readers on how to take cash out of pension funds and avoid inheritance tax.
The timer starts running on Wednesday, 10 weeks before the Budget, when the Office for Budget Responsibility (OBR) and the Treasury start exchanging forecasts and proposed tax and spending changes in order to arrive at an agreed position by the day itself.
Meanwhile, the traditional metaphor of Reeves as the superhero trapped in a spiked chamber with the walls closing in has never been more apt – although I have never understood why a baddie would choose that method to kill an opponent.
At this point, we need a close-up of Reeves’ face, with the thought bubble, “How did I get here?” This allows a recap of the story so far.
She put taxes up in her first Budget, to plug just enough into the public services to avert collapse, and said she wouldn’t have to come back for more. This was quickly clarified to mean “more on the scale of the last Budget”. Then it became clear by stages that that was precisely what she was going to have to come back for. The public finances continued to deteriorate, requiring emergency savings from disability benefits, but these were thrown out by Labour MPs.
Meanwhile, the prime minister had taken fright at the cut in pensioners’ winter fuel payments and had U-turned on that. Then the bond markets had a minor panic and pushed up long-term interest rates. They calmed down again, but borrowing costs are still higher than the OBR expected them to be last year.
And now the run-in to the Budget is about to start and nothing has turned up to rescue the trapped superhero. Zero. Zero growth. Zero hope of rescue.
Reeves still faces the impossible dilemma that she has faced for months: to break her election promises not to raise the main taxes (income tax, national insurance, VAT and corporation tax), or to break her fiscal rules.
At this point, we need to pause the narrative again, leaving the walls getting ever closer, to explain to Labour Party members preparing to vote in the deputy leadership election that Reeves’ fiscal rules are not some arbitrary self-imposed constraint that can easily be cast aside. Anyone can quibble with the details, but the essence of the rules is the minimum needed to keep the public finances on an even keel. The financial markets need to know that the British government can sustain its debts, or they will not lend any more. The Liz Truss experience and the jitters in the bond markets a few weeks ago were two unmistakable warnings.
So that means Reeves is going to have to raise taxes substantially, and probably cut planned spending too. She may be able to avoid breaking manifesto pledges through a combination of lots of small measures and some sophistry – similar to the claim that employers’ national insurance contributions are not a tax on “working people”.
That is what I think she will do. A lot of commentators are advising her to go for a clean break and say that unfortunately the world economic outlook is so bad (because of Donald Trump’s tariffs) that the manifesto no longer applies and she will have to put up income tax or VAT. It is claimed that she would gain some respect from the voters for her honesty.
No chance. I know Labour is unpopular and her public opinion ratings have fallen down a deep hole, but that would guarantee that things stay that way. Muddling through with stealth taxes, new taxes and possibly defining anyone earning more than a certain amount “not a working person” will be almost as unpopular.
But it may be just enough to stop the walls from crushing Reeves the Indestructible, and allow her to live another day – maybe even until the Budget in 2026.
