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The Treasury has insisted that Rachel Reeves will not hold an emergency tax hike budget next spring in case a drop in growth or other setbacks blows a hole in her fiscal plans, citing spending pressure if action is needed.
Last week showed disappointing growth data in the UK Shrinking economy For the second month in a row in October, raising the risk that official forecasts in the spring will show the chancellor is on track to breach her fiscal rules.
Reeves is currently set to stick to its key fiscal rule of day-to-day spending being funded solely by tax by 2029-30 by a margin of £9.9bn, leaving its plans vulnerable to cuts in growth forecasts or higher borrowing costs. Given annual public spending of £1.3 trillion, the margin is narrow.
The Office for Budget Responsibility is due to issue new forecasts in the spring on whether the Chancellor will meet her rules.
The Treasury said Reeves remained committed to “one major fiscal event each year”, the autumn budget. That will be the date at which the finance minister will announce any changes to taxes and borrowing, officials added, suggesting spending cuts will occur in the spring if fiscal tightening is needed.
The Treasury said: “We will not get ahead of these expectations, but no one should be in any doubt about the Chancellor’s commitment to economic stability and sound public finances.” “That is why adherence to financial rules is non-negotiable and we will plan for all scenarios.
“The Chancellor has been clear that she will not repeat the likes of the October Budget again, and is now focusing on growing the economy and eliminating waste in public spending through the second stage of the Spending Review.”
Treasury officials pointed to Reeves' comments this month to the Daily Mail in which he left open the possibility of a tax increase next fall.
“I won't be back in the spring. That's what the previous government did. They prepared the budget and then came back six months later,” Reeves told the Daily Mail.
The Chancellor also said last month at the BoE's business conference that she would “not come back with more borrowing or more taxes”, a comment that was widely used to rule out such measures for the rest of Parliament. Reeves and No. 10 later insisted that she did not have her hands tied over future budgets.
Official figures showed that gross domestic product fell by 0.1 percent in October, after a similar contraction the previous month, raising concerns that disappointing growth could put public finances under renewed pressure.
Ruth Gregory, of Capital Economics, said she expected the level of GDP to be 0.7 per cent lower by the end of this year than expected in the October budget.
She said that if this weakness continued in the coming years, it could reduce the Chancellor's margin of freedom by up to £13 billion, erasing this rise.
However, she stressed that the Office for Budget Responsibility was likely to view the current economic weakness as a temporary problem, limiting the damage to the Chancellor's fiscal space.
Reeves said she wants to end the recent practice of the Treasury Department preparing two major fiscal events a year. It wants its officials to spend the next six months instead focusing on measures to boost growth.
However, the Chancellor is expected to deliver an economic statement alongside OBR forecasts in the spring. Treasury officials say the The spring statements by former Conservative chancellor Philip Hammond – brief events with few spending announcements – serve as a model.
Hammond, like many of his predecessors, also wanted to hold just one Budget a year, but recent crises including the financial collapse, Brexit and Covid-19 have more often prompted chancellors to hold two such events a year.
