It was the phrase “non-negotiable” that rattled historians’ nerves. “The fiscal rules laid out in the Budget are non-negotiable,” chancellor Rachel Reeves said when she visited a British bicycle shop in Beijing today (Saturday).
The same phrase had been used earlier in the week by Darren Jones, her deputy, in the House of Commons, and before that by a Treasury spokesperson, which is when it first set alarm bells ringing.
This is a mistake well known to historians of British politics: being overly emphatic in an attempt to reassure the markets. A classic case study is John Major’s refusal to consider devaluing the pound in September 1992: “The soft option, the devaluer’s option, the inflationary option, in my judgement, that would be a betrayal of our future at this moment, and I tell you categorically that is not the government’s policy.” Six days later, it became the government’s policy.
Major never recovered from that humiliation. Most prime ministers and chancellors learnt from that experience not to be too categorical in closing off options and escape routes that they might need if events or markets turn against them.
Until Reeves, who has repeatedly made the mistake of boxing herself in. It may have been understandable for her to say in opposition that she had “no plans” to raise taxes, and she might have gotten away with raising taxes if she had been a little more adept at choosing which taxes to raise and which spending to cut.
But she continued to close off her options. In the October Budget, she promised to have just one Budget a year. It seemed an innocent enough pledge, designed to reassure businesses that stability had returned and that they could plan ahead without being hit by constant changes to the tax regime.
Except that a problem looms. She has promised one Budget a year but two forecasts. The Office for Budget Responsibility (OBR) is required to produce a forecast in March as well as in the autumn. If the OBR forecast shows that her fiscal rules are going to be broken, she will need an emergency Budget to address them.
It seems all too possible that the fiscal rules will be broken because the rise in world interest rates means that government spending will be higher than the OBR expected in October. The unease in the markets about this possibility has become a self-reinforcing cycle as UK interest rates are pushed higher still.
Hence, Reeves’s insistence that the fiscal rules are “non-negotiable”, but this attempt to reassure the markets is likely only to make things worse. It means that if the OBR says the fiscal rules will be broken, she must act immediately. She cannot wait until the autumn Budget to raise taxes or cut spending; she will have to make a statement on 26 March. If it involves tax or spending changes, even if announced in advance, that will turn the statement into a “fiscal event”. In other words, a Budget.
Having a Budget and denying that it is one, after she said she wouldn’t, will further undermine confidence. Especially since she compounded the error after the October Budget by telling the CBI that the tax rises were a one-off and “we will not be coming back with more”. Again, she made the mistake of being overly emphatic: the line was that she would not need to do another Budget “like” the one she had just delivered, but she overdid it and implied that she wouldn’t have to raise taxes again at all.
No wonder the private mutterings of some of her cabinet rivals are starting to surface in public. One anonymous cabinet minister told Huffington Post: “She’s trying to get a royal flush with a two, a seven, and an eight.” Labour members are prepared to accept that she has been dealt a difficult hand by the Conservatives, but increasingly say that she is playing it badly.
Hence, some overheated talk about Reeves being moved, usually followed by “but there is no one obvious who could take her place”. We do not need to go so far as to canvass alternatives because it would be disastrous for the government to change chancellor after less than a year. Starmer and Reeves are tied to each other: her policy is his policy; her mistakes are his mistakes. John Major sacked Norman Lamont eight months after the collapse of the government’s exchange rate policy, and it did him no good.
So, Starmer and Reeves must bear the impact of crashing into the brick wall of 26 March together. Between them, they have failed to give themselves enough room to avoid the collision. The only thing that can save them is some good luck on the economy that brings the OBR forecast back into line with Reeves’s fiscal rules in time.
Although it is worth mentioning that even if Starmer and Reeves have to hold an emergency Budget to raise taxes further and cut spending, it wouldn’t be as damaging to their reputations as Black Wednesday was for John Major’s.
The bottom line for this Labour government will hold. Things may get worse before they get better, but Starmer has a huge majority, and neither the Conservatives nor Reform looks likely to remove it altogether.
