Chancellor Rachel Reeves was standing her ground. In the week she dropped a £40bn tax bombshell on Britain and unsettled markets with plans for £28bn of extra annual borrowing, she declared: “What alternative was there?”
On the street outside the Treasury the mood was equally resolute. On Wednesday night some 200 of Reeves’ officials toasted the completion of one of Britain’s biggest Budgets at the Two Chairmen pub, many refusing to budge when a motorist tried to force his way through the throng.
The confidence on show outside the Westminster pub — a belief that the Budget had set Britain on a tough but necessary new course — will be severely tested as political opponents and the markets dial up their scrutiny of the package.
Reeves, Britain’s first female chancellor, made history on Wednesday and was cheered by ecstatic Labour MPs after 75 minutes at the House of Commons despatch box, sipping only occasionally on a glass of water as she set out her defining Budget.
Initially markets, prepared by weeks of pre-briefing, reacted calmly as Reeves confirmed her decision to loosen her fiscal rules to allow a wave of new borrowing — an average £28bn over the next five years — for capital investment.
But as the fine print of Reeves’ Budget was pored over in the City and among Labour MPs at Westminster, some started to feel decidedly queasy. Gilt yields rose on Thursday and Friday; a sustained increase in government borrowing costs would set nerves jangling.
Behind the headline numbers of £40bn in higher taxes and £74bn of higher spending were some ominous forecasts by the independent Office for Budget Responsibility.
The forecaster downgraded its growth projections for later in the parliament to just 1.5 per cent; Prime Minister Sir Keir Starmer has targeted 2.5 per cent and wants Britain to have the fastest growth in the G7.
The OBR’s forecast of a minuscule growth in disposable income, upward pressure on inflation and mortgages, and Reeves’ admission that some of the £25bn tax rise on employers would be passed on to staff, also unsettled Labour MPs.
“She’s mucked it up,” said Andrew Griffith, a former Conservative Treasury minister. “We’ve had the biggest ever rise in taxes and we’ve ended up with a lower growth forecast than we had at the start of the week.”
Tories believe that, ultimately, Reeves will have to put up taxes later in the parliament to top up the small rises in spending pencilled in for public services. The Institute for Fiscal Studies argued that £9bn more would be needed to avoid further real-terms departmental cuts.
One Tory shadow minister smiled: “We have just seen that Labour are in for one term.”
That is certainly not the prevailing view among most Labour MPs, who believe that Reeves’ tax rises were needed to patch up public services — such as the NHS, schools and prisons — that were left in a dire state by the Tories.
Reeves insisted after her speech on Wednesday: “This is not the sort of Budget we would want to repeat. But this is the Budget that is needed to wipe the slate clean and to put our public finances on a firm trajectory.”
The chancellor argues that £100bn of extra investment during this parliament will help to shake Britain out of its growth torpor, even if many of the benefits will show up only after the next election.
There is nonetheless some nervousness in Labour party ranks. One former minister said: “Capital expenditure takes a long time to yield benefits and if living standards don’t improve soon, there will be trouble.
“We have to get re-elected in four years’ time. The question we are all asking is, when are people going to feel the benefits of this?”
The verdict of the markets is seen as critical. Reeves and the Treasury had for weeks attempted to reassure the City that the Budget borrowing plans would be responsible and constrained by “guardrails”.
For now, the City mood is nowhere near as febrile as it was after Liz Truss’s disastrous 2022 “mini-Budget”, but a negative market reaction would intensify the Westminster debate.
The Budget amounts to one of the biggest fiscal loosenings of recent decades, according to the OBR, with overall borrowing set to be £142bn higher than previously expected between 2024-25 and 2028-29.
The chancellor overhauled her borrowing rules, declaring she would meet both of the key ones two years early.
Mahmood Pradhan, head of global macroeconomics at Amundi Asset Management, said investors had some “question marks” about the chancellor’s borrowing plans.
But he pointed out that Reeves could rein in borrowing if necessary.
“It is true that the Truss episode lingers in investors’ minds but the big difference here is this is not an unfunded package, the way Truss’s tax cuts were,” he said.
Rupert Harrison, former adviser to Tory chancellor George Osborne, said: “We shouldn’t let the scale of the Truss episode set the standard. Moves like this in response to any Budget pre-2022 would rightly have been seen as a disaster.”
Tory veterans of the Truss 2022 debacle joke that all Reeves needs to do now is go on Sunday’s broadcast round and declare: “There is more to come.” Kwasi Kwarteng, Truss’s chancellor, made the same claim about future tax cuts, sending markets into a tailspin.
On Wednesday, Reeves raised the spirits of the Labour benches with a promise to cut beer duty by 1p — a tax break that would deliver the equivalent of a free pint for every 650 consumed by her officials at the Two Chairmen.
The country and Labour MPs will be hoping that her Budget — a turning point for the British economy and historic in many ways — does not come with an unwelcome hangover attached.