Reeves Trussed Up

The Chancellor is in a mess. Although the Budget cleared the immediate hurdles of pleasing the left of her party whilst not frightening financial markets, the conduct of the process itself is in the spotlight. Who knew what and when is not just a parlour game for lobby journalists. Financial markets rely on information to form judgements; fellow MPs are given the line to take to prosecute their case to the public; and voters despise dishonesty and hypocrisy. Now that the OBR have revealed there never was a fiscal black hole, markets will question the credibility of the government, Labour MPs will feel like fools and the polls will show voters turning further away from the Prime Minister and his Chancellor.

• For markets, where the OBR had been invoked as the primary economic decision maker, the revelations demonstrate that Starmer and Reeves now subordinate this to the political imperative of remaining in post.
• In doing so, Labour MPs feel, not for the first time, that they have been taken for fools. A cabinet minister has told The Times “At no point were the cabinet told about the reality of the OBR forecasts”. Once the PM and the Chancellor lose the cabinet, they are in serious trouble.
• Although voters might not understand the minutiae of HMT/OBR negotiations, they already have the measure of a government that has repeatedly broken its promises.
  • Reeves described national insurance hikes as a “tax on jobs” and that it “would hurt working people” to extend the freezing of income tax thresholds – but has gone ahead in her first two Budgets and done both anyway.
• Once the polls reflect a discontented public, the imperative for Labour MPs to remove Starmer and Reeves will gather momentum.
  • A snap YouGov poll has shown that voters see this Budget as unfair by the highest margin since the Truss mini-Budget.

With a leadership challenge now able to be mounted at any time, as long as 80 MPs can be found to propose an alternative leader, opponents are simply waiting for an excuse to pull the trigger. Our Starmer Ratings show that discontent to the leader is widespread enough to gather the requisite number of votes – and anyone hoping to avoid facing Rayner or Burnham can benefit from moving sooner rather than later.

We had thought that it might be a budget measure or market volatility that would provide the opportunity to defenestrate the leadership. Now, it could simply be that the Chancellor’s position becomes untenable.

None of the narrative around the Budget stacks up. There was no big black hole. There were tax rises for savers, landlords and pensioners but not for banks. Somehow rail fares have been frozen for the first time in thirty years but electric vehicles must now pay a mileage charge. Over-engineering has led to quirks such as making it less, rather than more, attractive for a business owner to sell to an employee ownership trust. The list goes on, whilst the narrative crumbles.

Into the vacuum, the Chancellor is herself becoming the story. Both the Conservatives and the SNP have written to the Financial Conduct Authority to ask them to investigate whether the Chancellor and the Treasury have delivered “misleading” statements. Nigel Farage has written to the PM’s Ethics Adviser to ask him to investigate whether Reeves has broken the ministerial code. The Chairman of the OBR, Richard Hughes, will appear in front of the Treasury Select Committee on Tuesday morning, which at the very least means the story of who knew what and when will continue to run.

This isn’t just the usual rough and tumble of Westminster intrigue. The Chancellor now has members of her own cabinet wondering what on earth she was up to. Markets took fright when the u-turn on the u-turn of income tax hikes was revealed – now they might wonder why she’s taking such political risks when the economic risks were not as large as indicated.

Was this all a cunning political ruse to beat expectations by delivering fewer tax rises on Budget Day? Was it to create a political narrative to deliver a tax-and-spend Budget for the left of the Labour Party? Or to talk tough to markets by delivering a more-than-doubling of the headroom? Or was it just panic, cognisant of the warning from Jeremy Hunt in a recent article that ‘it is always sensible to build up headroom. Typically, changing economic forecasts mean a swing of about £20bn – in one direction or another – of margin between budgets’.

So far the explanation has been:

• It’s a “silly row brought about by people who can’t do maths” – from a Number 10 source
• “some people are suggesting that there was a small surplus” – Rachel Reeves to Laura Kuenssberg referring to the official OBR document
• “that productivity downgrade meant that they forecast tax receipts were going to be £16bn lower” – Rachel Reeves to Trevor Phillips
• “in addition to that the OBR said before the measures that I took in the Budget that inflation was going to be higher and that would result in higher tax receipts” – Rachel Reeves also to Trevor Phillips
• Reeves twice referred to her “speech of 6th November” in her interview with Laura Kuenssberg, even though she meant the one on the 4th of November.

It’s clear the Chancellor is under a lot of pressure and struggling to explain what happened. Whether that’s due to exhaustion, incompetence or some other reason doesn’t really matter. The aspersion has already been cast, as these front pages demonstrate:

Reeves chose to personalise herself as the asset.

• In her first party conference speech as Chancellor, she said “We were elected because, for the first time in almost two decades, people looked at us – looked at me – and decided that Labour could be trusted with their money”.
• When Andrew Marr interviewed her and suggested breaking a manifesto pledge would mean she should resign, she replied “and what do you think would happen in financial markets if I did that?“.

With trust in her judgment now in question, the asset is becoming a liability. Financial markets might have given her the benefit of the doubt on Budget day, thanks to a combination of lower Gilt issuance than expected and relief that nothing worse was lurking than what had already been leaked. She also got a helping hand from the NY Fed’s John Williams as his implied support for an upcoming Fed rate cut helped to reduce overall levels of market volatility. The VIX index is back below 20, leaving political risk once again to hover just beneath the surface.

It now falls to the prime minister to sell the positives from the Budget. The press has been full of front pages that portray the Chancellor’s “hard decisions” as making The Strivers pay for The Skivers. 
 

Keir Starmer is not known for his skill as a salesman. He flip flops, he prevaricates, he backs off. One of his first acts as prime minister was to remove the whip from seven of his MPs for supporting an SNP amendment that sought to abolish the two child benefit cap. This same policy then provided the denouement to Reeves’ Budget speech, announced to cheers from her back benches.

The economics has given way to the politics. Far from dealing with an economic black hole, it was a political one of the Chancellor’s own creation. Reeves’ political decisions turned a surplus into a deficit that she then had to claw her way out of, shoving in some extra tax hikes to beat market headroom expectations on the way. She set the scene on 4^th November, warning “the productivity performance is weaker than previously thought” which “has consequences for the public finances too, in lower tax receipts“. But the script for the set was a lie.

And through all of this, the jeopardy for the public finances remains. Within the 197 pages of the OBR’s Economic and Fiscal Outlook, this is the key paragraph:

The fiscal consolidation is planned to take place just before and just after the next election (assuming the parliament runs its full course) which stretches credulity to breaking point. Before that, borrowing will now reach its highest ever level (excluding the pandemic):

If financial markets think that political risk has subsided because the Budget statement has been delivered, throwing red meat to the left wing of the Labour Party, they are mistaken. Starmer’s opponents remain waiting in the wings, marshalling their resources, ready for a slip up at any moment. The way that the Budget has unfolded has given them more means, motive and opportunity. Markets will respond once it becomes clear just how much political risk is attached to this government.