After the Budget, doubtless, there will be much talk about Rachel Reeves’s decision to tweak her fiscal rules, which supposedly bind Chancellors, rather like Odysseus, to the mast. In practice, however, the only thing I have ever come across that is more flexible than the fiscal rules is a publisher’s deadline.
I suspect that the financial markets won’t be much bothered about how the Chancellor amends the fiscal rules. Rather, they will assess whether the extra spending is readily absorbable by the economy without creating much additional inflationary pressure and whether they believe the Chancellor will follow a reasonably prudent path on borrowing in the years ahead.
In this regard, Ms Reeves will surely have been influenced by the Truss/Kwarteng debacle of two years ago. Admittedly, the presentation of the mini-Budget’s programme of tax cuts was appalling and she will surely do much better.
But in the end, it was the substance of their proposals, not the presentation, that really rattled the markets. The Chancellor needs to make sure that nothing similar happens this time.
I expect her to increase investment spending by about £18bn (0.7pc of GDP). If so, the gilt market will probably take this more or less in its stride, with 10-year yields already having risen by almost 0.4pc in the last month. Whereas until recently a fall in Bank Rate to about 3pc by the end of 2025 seemed a reasonable central case, I now suspect that the rate won’t fall below 3.5pc, and the out-turn could be higher than this.
On Wednesday everyone will naturally be watching out for how the Chancellor’s measures affect them. But for anyone interested in the impact of the Budget on the national economy, there are four major things to look out for.
First, has she announced anything that can plausibly boost productivity? Second, does the proposed increase in public investment make economic sense? Third, have the financial markets reacted favourably to the increased spending? Fourth, how severe is the risk of rich and talented people leaving the country?
On the answers to these questions will turn the judgement as to whether she has laid the foundations for economic success or deepened the UK’s economic malaise.
Roger Bootle is senior independent adviser to Capital Economics.
roger.bootle@capitaleconomics.com