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No special budget red box was ordered for Rachel Reeves when, mid-morning on Wednesday, she became the first woman to hold one up outside number 11.
There will be no frills, few jokes and don't expect a big rabbit out of the hat.
The number crunchers, bean counters and abacus economists, so ridiculed by Liz Truss, have taken back control. Inside this repurposed red box will be a boffin's budget.
In fact, it could be defined as being the opposite of everything that was in Truss and his chancellor Kwasi Kwarteng's infamous mini-budget two years ago.
They famously declined the offer of a forecast from the Office of Budget Responsibility, with Truss later deciding that the forecaster was part of a “deep state” conspiracy against his premiership.
This time, the OBR has carried out its full 10-week, back-and-forth audit of both the public finances and all tax and spending policy measures, Reeves predicts, adding to what seemed be a long pre-assessment schedule. -Budget preparation.
The long three-month wait after the election has dampened consumer and business confidence, as well as the economy. Business leaders tell me they can cope with tax hikes, but prolonged uncertainty hurts the economic mood. Some believe that the opportunity was missed, after three years of successive crises, to take an important turn this summer, with a new stable government and interest rates finally falling.
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Rachel Reeves defines her budget as the opposite of Liz Truss and Kwasi Kwarteng's “fiscal event” two years ago.
However, the turning point could come now. This budget is part of an important global economic pivot. Years of higher government spending and borrowing, alongside higher interest rates to curb soaring inflation, have given way to the opposite. Looser monetary policy, meaning lower interest rates, and tighter fiscal policy, or higher taxes and borrowing limits, are the new normal.
In this budget box are a wide range of tax increases. It might have been simpler to list those that will not increase. The most important, as I have pointed out, will be the increase in employer National Insurance Contributions (NIC). I understand that Reeves was advised internally in July simply to reverse the “unfunded” 2% cut to National Workers Insurance introduced by the Tories. But she insisted that she could not break the electoral promise not to create this form of CNI.
Of course, there will be a heated argument over whether increasing employer NICs amounts to the same thing. Labor supporters point to a footnote in their election materials which clarifies that the manifesto pledge only applies to employee NICs, and claim they have been attacked on this point in advertisements and conservative speeches. This implies that the words of the Labor manifesto were carefully crafted to enable an increase in employer NICs.
Last week, at the International Monetary Fund meeting in Washington, I directly challenged the Chancellor on why she had not been clearer to the electorate about potentially across-the-board tax increases , including on national insurance.
She told me there were three factors behind this difficult budget. She repeated her calculation of an inherited “£22 billion black hole” – which she says she inherited from her predecessor but did not foresee. She now says that the deficit will continue “in the years to come”. She said the OBR would publish its review into how overspending was “allowed to happen”, alongside the Budget. The Treasury sees this as an important sideline to Wednesday's main budget speech.
Reeves also highlighted compensation payments for infected blood and the Horizon Post Office scandals which she said “the previous government didn't put money in place for”.
Third, the UK cannot continue on the path it is currently on with public spending, she told me, given the state of public services, such as prisons and services health, and the new government's promise that “there would be no public spending”. a return to austerity.
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If Reeves succeeds, markets and borrowing costs should remain calm
What we've heard so far about the Budget sounds pretty austere, but the Chancellor defines austerity as a real reduction in government spending. It appears that ministries will receive supplements to cope with the rising cost of services.
The compromises in his budget are driven by his new fiscal rules. A new rule governing borrowing for investment, the 'investment rule' will replace the old debt rule, helping to reverse a planned £20 billion cut in spending on major investment projects. The new, broader measure of debt must decline within five years. But it is the new “stability rule” which will be the binding constraint on Wednesday. All daily expenditure of ministries, in terms of social assistance and debt interest, will have to be financed by tax revenues over a certain, as yet undetermined, period. This could be a really strict rule, much stricter than that of the Conservatives. The loan will only be used to invest.
Together, these two rules will define not only this budget, but the next half-decade, affecting every penny the government spends. Labor has calculated that its overwhelming majority is rooted in the public's desire to address underperforming public services, such as the NHS, and in the decline in the quality of the public realm, from transport to city centers to to housing. According to this view, the real “black hole” lies in public services. The “fiscal fiction” of unrealistic spending plans will become fiscal reality.
By demanding that spending gaps be filled with significant tax increases, the strategy here is to communicate an overwhelming tolerance for political pain to the markets that lend money to the public treasury. Essentially, a massive majority will be used to credibly secure surpluses on “current” spending. Some taxes will increase, but the bottom line is that this should help keep interest rates low for households, businesses and the government itself.
As a prominent central banker said on the sidelines of the IMF meeting, what is important in terms of market credibility is not just the amount of borrowing, but also the consistency of history and strategy around this loan.
A new chancellor must establish financial credibility. After all, it is common knowledge that credibility is hard to gain and much easier to lose. That’s the purpose of these self-imposed rules. But in recent years, chancellors have also had political credibility problems. More than one of them had been in office too short a time to even have an official budget. This is not a certainty given that all budgetary measures will actually be adopted by a rebellious and undisciplined ruling party. Across the Channel, this is precisely the problem in France, where Reeves' counterpart, Antoine Armand, must convince that he can indeed adopt tough measures as a minority government. Rachel Reeves has no such problems.
Indeed, during an event in Washington addressing bankers, members of Congress and senators at the British ambassador's residence, the chancellor had a moment of reflection. Exactly two years before, Kwarteng had delivered the same speech, against a backdrop of widespread mini-fiscal turmoil, including jokes about his shared role with Isaac Newton in resolving a historic sterling crisis. Following the Kwarteng “fiscal event”, members of the boards of UK clearing banks had to reassure their counterparties that Britain was “fine”. Finance ministers from developing countries were making the same half-joke about Britain, the old master, now the economy in crisis.
For a chancellor who, twenty years ago, was seconded to the British embassy as an economist, during one of Argentina's debt crises, this was anathema.
That's why, on Thursday morning, she and her team expect some anger from the richest taxpayers and bad headlines in some newspapers. But the flip side will be relief for users from the difficulties of many public services, and in particular what the Treasury hopes will be tranquil financial markets as it embarks on a long-term program of long-delayed investment in Britain's economic future.
This is a budget that will be unpacked and dissected for months, if not years.
