One of the most interesting parts of the budget and it hasn’t been mentioned here yet, is how obviously it was a budget designed solely to meet fiscal rules for the sake of the bond markets.
And it’s pretty much worked. The yields on long term government bonds dropped yesterday by a bigger percentage than has happened on budget day for about a century.
Today yields have risen again slightly as markets have digested somewhat the sleight of hand used to make the figures work. But the overall impact has been good for Reeves.
The sleight of hand she used is that many of the ‘balancing items’ to get the budget to meet her fiscal rules and to increase her budget headroom are back loaded to the end or close to the end of this term and may, or may not ever actually happen.
Stuff like mansion tax, EV per mile charging, NI on pensions, and others as well.
So what was the purpose? Well for every £100 tax we pay, around £10 goes to paying interest on government debt. So if the bond yields rise (interest we pay in government debt) that has a huge negative impact on what is left for everything else. (In contrast for example, around £0.30p of every £100 tax is spent on immigration).
So keeping ‘the markets happy’ has a very real impact on all of us.
She will hope that over the next three years (so before these measures kick in), there will be an uptick in economic growth which will mean that her rules (and headroom) are at least partially met through growth, meaning that some of the measures may not be needed. (As it happens, I think the mansion tax is a ‘look at us taxing the rich’ measure anyway - it doesn’t raise any money, it’s for show so will be kept whatever the need).
Her budget has, in effect, spent money now, largely on the poorer people in society (removal of the 2 child benefit cap, reintroduction of much of the winter fuel allowance, increasing minimum wage across the board etc), paid for a chunk of it with the freeze in tax allowances, increased taxes on unearned income (dividend and interest income taxes will increase in April) which are seen as measures which target wealthier people, and kicked much of the rest of it down the road to be brought in if needed when we get there.
So it’s a long way from being as ‘strict’ as it first appeared.
It will also have the impact, of course, of allowing her (or her successor) to say in the future (in an election year at that), ‘we aren’t going to bring in these measures after all because we’ve had economic growth’ which will look like tax reductions, or, at worst, we are bringing them in and it’s old news by then.
It’s effectively a budget that meets rules while allowing flexibility.
