Is Rachel Reeves a genius?

There has probably not been a more anticipated budget in recent times, but in a post Truss-Kwarteng FUBAR budget era, the nerves are certainly being felt by consumers, business and markets alike.

The usual hints and managed leaks, set to test the water and de-risk surprise moves are a plenty and the debate is already in full swing within the media as to whether or not an increase to employers NI contributions amounts to a breach of a key manifesto pledge or not. At the end of the day, this is the gamesmanship of politics, however the Chancellor will be more concerned about the reaction in the markets than the press.

In reality, the key challenge is not one of an alleged ￡22bn black hole, it is one of an absence of the consumer spending power required to generate genuine growth. ?Inflation may be back to a bearable level, and is likely to dip below 2% this week, however the cumulative impact of a period of high inflation and a rapid re-normalisation (by historic levels) of interest rates on the consumer purse would require an extended period of wage inflation to return to anything like pre Trussonomics levels. The “Cost of Living Crisis” that ensued and its impact are well known and documented, however with an additional 1.3m fixed mortgage deals due to expire this year and wage growth having slowed again in August, its clear we have not swam far enough away from the Truss shipwreck to be certain that we wont yet be pulled down.

So what is the Chancellor to do?

When it comes to inflation, higher interest rates may have played a part in reducing inflation, it could be argued that this has had only marginal impact due to the supply side nature of the inflationary causal factors. That said, true to monetary theory, the reduction in the supply of money does drive down inflation, however rather than suppressing an overheating demand led market, it has suppressed growth and consumer resilience as well as confidence.

A material increase in the money supply driven by the Government is unlikely, albeit that the Bank of England is likely to follow the predicted 25bps cut by the ECB this week, therefore spending and the deployment of a little Keynesian economics might well be the only tool in the box.

To do this Reeve’s will certainly have to borrow, however in changing the fiscal rules she risks running the gauntlet of the market to avoid an almost inevitable increase in the cost of borrowing, the cost of which already sucks up ￡1 for every ￡12 collected by the Government today, so placating the market and convincing it that it remains stable and a good bet is key.? This was the key area in which Trussonomics failed and where the Bond market vigilantes pounced with devastating effect.

It is almost inevitable that the tax take will also need to rise in the near term, and that, in line with previous promises the general public must not be asked to pick up the tab (directly at least!). Talk around non-doms etc is no more than optics and window dressing, as is the proposed taxation of private education (that is a whole debate by itself) – the real headline is expected to feature employers’ national insurance contributions.

Now I am as far removed from the present government’s political ideals as one could be, however Reeves finds herself starting the game at Check and this one move is perhaps the only sensible route to avoid Checkmate. Not only does this raise much needed funds, this move restricts the money supply without directly impacting consumer spending, thereby keeping inflation in check without critically damaging the green shoots of economic growth. This in turn supports the softening of interest rates over the near and medium terms needed to return resilience to consumer spending.

A brave move for sure, but one for which Reeves should not be condemned. As opposed to moves to secure further funds from non-doms and off-shore companies, employer NI is far more difficult to avoid and therefore the surety of the additional near terms funds that can be raised through this mechanism are indeed priceless.

The fact is, doing nothing is not an option in politics, even when doing exactly that is the right thing to do - the key for Reeves is not to lose, and with a plethora of own goals behind him, I think Sir Kier would settle for a score draw.. If she lands it, it could indeed prove to be a genius move. I will reserve judgement, however, as to whether Reeves is in fact herself a genius!

Neville Cotton

Disclaimer: These views and reflections noted here are my own and in no way represent the opinions of my employer or other organisations to which I support.