Shanaz Musafer
Business Reporter, BBC News
Getty images
Chancellor Rachel Reeves has established her plans for the British economy in her spring declaration and is on the right track to respect her self-imposed rules on public finances, which, according to her, are “non-negotiable”.
At first glance, it seems to be a good thing. So why do people say that she can find it difficult to meet them and that the only way to do so is to increase taxes?
It is a complicated image.
1. Not a lot of spare money
Before the spring declaration, the Chancellor had been under pressure, with speculation on how she would be able to respect her self-imposed financial rules, one of which must not borrow to finance daily expenses.
In October, the government’s official economic forecastist, the Budget Liability Office (OBR), said Reeves would be able to respect this rule with 9.9 billion pounds to lose.
Since then, an increase in government loan costs have noted that this part to lose had disappeared. Now, the large well-being cuts and the discounts of spending in the spring declaration have restored it.
Nearly 10 billion pounds sterling may seem a lot, but it is a relatively low amount in an economy that spends 1 billion of sterling books per year and which increases the same thing.
In fact, it is the third lowest margin that a chancellor has been allowed since 2010. The average height during this period is three times larger at 30 billion pounds sterling.
“It’s a small risk fraction for prospects,” Richard Hughes of OBR said BBC.
He said there were many factors that could “eliminate” the height of the Chancellor’s height, including an escalation of the trade war, a very small demotion of growth forecasts or an increase in interest rates.
2. Proposing the future is difficult
This brings us to precarious nature to make economic forecasts.
“All forecasts are wrong. The weather forecasts are also wrong,” said Hughes.
Predict what will happen in the future, especially in five years, it is difficult and is subject to revisions. You might be forgiven not to predict a war or a pandemic, for example.
The respected reflection group, the Institute of Tax Studies (IFS), has already declared that there was “good chance that economic and budgetary forecasts deteriorate considerably between now and an autumn budget”.
An example, just a few hours after Reeves delivered his statement to Parliament, US President Donald Trump announced new 25% prices on cars and car parts in the United States.
3. Car prices A worse sign could come
Reeves admitted that the prices of the car would be “bad for the United Kingdom”, but insisted that the government was in “extended” talks to prevent them from being imposed here.
According to the OBR, these import taxes have a direct effect on goods totaling approximately 0.2% of GDP.
Before Trump’s announcement, the OBR had warned against the risk of climbing trade war, and although the proposals do not exactly correspond to the Watchdog scenario, which would see the United Kingdom Riposte, Hughes said it had elements.
Although 0.2% is a small quantity, it will nevertheless affect the economy.
And in the worst scenario of the OBR, 1% would be eliminated ecomic growth.
4. Uncertainty means that companies and people do not spend
Trump’s trade policies and the fact that no one seems to know if he will follow his threats, his U-turn, or the way he will react to others is only a way in which his presidency makes the world so uncertain at the moment.
The war in Ukraine continues, despite Trump’s commitment to end it.
The United Kingdom, with Germany, said it would increase defense expenses. Trump has long called NATO European members to spend more in defense, and there are also fears than if the United States concludes an agreement with Russia to put an end to war, it could leave Europe vulnerable.
At the national level, companies are also faced with a worrying time because they are preparing to increase costs in April as national insurance contributions from employers, national salary and trade rates should increase.
Some companies have declared that they have discouraged investment decisions accordingly, and many have warned of price increases or job cuts. If these materialize, this will lead to growth.
5. Break the rules or increase taxes
Given all of the above, if the Chancellor’s head margin disappeared, why would it be important?
Reeves has put its reputation to respect its budgetary rules, undertakes to bring an “iron discipline” and to ensure stability and insurance of the financial markets, unlike the former Prime Minister Liz Truss, whose unlikely tax reductions have frightened the markets and increased interest rates.
So, if she always wants to respect her rules and not to borrow to finance daily expenses, this would mean more discounts of expenses or tax increases.
The government has already announced major reductions in the well-being bill as well as plans to reduce the public service and abolish several Quangs, notably the NHS in England.
But as Paul Dale, chief economist of the United Kingdom says in Capital Economics: “Non-defensive expenses can only be reduced so far.”
By leaving so little room for maneuver and with such precarious economic prospects, “we can surely now expect six or seven months of speculation on taxes may or may not be increased in the fall,” said Paul Johnson of IFS.
This speculation itself can cause economic damage, he says.
Reeves did not exclude tax increases but told the BBC that there were “opportunities” as well as “risks” for the British economy.
