Four options for Reeves to balance the books as Treasury braces for mini-Budget

A new spring fiscal event – or “mini-Budget” – has not been ruled out by the Government with surging borrowing costs putting pressure on the Chancellor to act. But what are the measures Rachel Reeves could take to restore economic confidence?

Experts suggested to The i Paper she has at least four: take a tough stance on public sector pay, make cuts to unprotected Government departments such as the Home Office, change her debt rules or raise taxes.

The latter two are however unlikely given the Chancellor has committed to maintaining her self-imposed fiscal rules and Treasury minister Darren Jones on Thursday appeared to rule out further tax hikes.

1. Public sector pay

Taking a firmer line on public sector pay negotiations is one of a suite of options available to the Government as it seeks to find new ways to balance the books, according to a former minister.

Sir Steve Webb, a pension minister in the coalition years, has suggested the Government may take a “tougher line” on public sector pay negotiations as a result of the financial squeeze it finds itself in.

This squeeze has followed a sell-off of UK Government debt, fuelling a rise in long-term borrowing costs to the highest level since 1998.

Webb added that given public sector pay is such a significant part of the Government’s spend, it may be less flexible in negotiations as a result. This comes in the same week that the largest education union in England said it would ballot members on whether to accept or reject the Government’s pay offer of a 2.8 per cent increase for this year.

2. Spending cuts

The Chancellor is reported to be assessing deeper spending cuts than originally planned as her department works on a spending review.

If the Chancellor does opt to cut spending, it is unlikely she will reduce funding to the NHS. Cutting waiting lists and improving patients’ overall experience of the health service is viewed as essential to Labour’s chances of re-election, so ministers are likely to judge that they have no other option but to continue increasing NHS funding.

Likewise, rising geopolitical tensions and Labour’s commitment to increase spending to 2.5 per cent of GDP means that the defence budget will not be raided.

In practice, this will mean that the axe of any further spending cuts will once again fall on “unprotected” departments such as the Ministry of Justice, the Home Office and the Ministry of Housing, Communities and Local Government.

Webb feels the most likely course she will take is “an across the board squeeze”.

He said: “She may ask departments to make general efficiency savings – say give every department half a percent less in funding. This could be attractive too given that the Chancellor has received a lot of criticism for her decision to remove fuel allowance from pensioners who are not on benefits.”

Webb added that decisions around disability benefits could be considered too – which are already being reviewed in a Green paper. These could end up at the “tougher end of the scale”, he added.

3. Changing fiscal rules

The Chancellor’s upcoming spending review has been made more complicated as the increase in bond yields has wiped out the wiggle room needed to meet certain fiscal rules.

These rules, that the Government has committed to, include getting debt falling as a share of national income by the end of this parliament.

The reason UK bond yields have gone up is because the same is happening for US bonds in anticipation of Donald Trump reentering the White House.

And as US bonds have started paying higher rates, international investors are demanding higher rates on UK Bonds in order to be persuaded to continue holding them. This has meant the Government has to increase the return on UK debt, so investors will still lend it money in the volume it needs, meaning the money it’s paying on interest has increased.

“This leaves the Chancellor in a difficult position,” said Professor Stephen Millard, deputy director of the National Institute of Social and Economic Research, who used to work at the Bank of England. “She could raise taxes, although she has ruled this out, change or fudge the fiscal rules or cut spending.”

Professor Millard adds that, were she to try and change or fudge the rules, then this might intensify the bond sell-off and entrench the problem as it would give “the market another reason not to invest in the UK”.

4. Hiking taxes

Although the Government ruled out Government tax hikes, should this change, there are several options Reeves could consider, according to Ashley Webb, UK Economist at Capital Economics.

This includes further increasing the rates of capital gains tax, alcohol and tobacco duties, air passenger duties or vehicle excise duty.

He added the Government could also tweak existing tax policies.

He said: “For instance, the Government could reduce the amount of tax relief on pension contributions for high earners, or scrap the lifetime ISA. The Government could also increase the size of the tax base of existing taxes.”

Since 1 January, the Government has imposed VAT on private school fees at the standard rate of 20 per cent, which is a widening of the VAT tax base. The Government could go further by introducing VAT on other products and services that are exempt.