The UK Budget Process

• With the Labour government committed to genuflecting at the altar of the OBR, they are unable to confirm what will be in the Budget until the very end of the process.
  • This is the reverse of how budgets used to run, where the Chancellor would make decisions and the OBR would pass judgement, with a slight tweak after that if required.
  • Now it is an iterative process, back and forth between HMT and OBR, arguing over assumptions and second and third order impacts of various decisions.
    • Hence salary sacrifice schemes must be considered in order to prevent taxpayers from reducing taxable income such that more revenue is raised for the government.
• This creates a long and leaky process, compounded by optimising for political as well as economic constraints.
  • It is why kites are flown, shot down and resurrected.
    • Options A through to Z don’t just raise X but also cost Y in political capital.
• But just as economics is affected by dynamic factors, so too is the politics.
  • If a leader becomes embattled, the political cost doesn’t just rise but rises exponentially.
• This is a political doom loop akin to a fiscal one.
  • And the leaking of the process itself creates the sense of a government not in control of its own destiny.
• Markets have now been invoked at every step of the way in the Budget process.
  • In the summer, government sources told the Guardian “a “no surprises” approach will be crucial to prevent negative market reaction. “Last year was a model of how to do it,” one said. “Had we done it otherwise, it would have been a mess.”’
  • The Chancellor and Prime Minister both argued markets would react badly if they were forced out. 
• Rather than imposing discipline on left-leaning Labour MPs, it creates a rod for the back of the PM.
  • Any flicker of negative market movement, whether related to the Budget or not, will invalidate the approach.
  • It also irks Labour MPs who didn’t wait fourteen years to get into politics just to be, as Andy Burnham put it, “in hock to the bond market”. 
• It also imposes an impossibly high bar on the Budget itself. Nothing can go wrong with it politically.
  • But as former Labour Chancellor adviser Damian McBride wrote in the wake of the Omnishambles 2012 Budget, Osborne’s “team were so focused on the big ticket [items]…that they took their eye off the other balls”. There are now too many balls, but also too many eyes.
• This Budget is not yet finalised.
  • It is likely to change again. We heard Plan A, now Starmer is reaching for Plan B. The OBR will run the numbers. Expect Plan C to emerge.
• It is unclear whether Starmer and Reeves can survive this public negotiation process of their own creation.

But the damage it is doing to them politically will certainly hasten their departures.