Is Rachel Reeves facing ‘Groundhog Day’ in her upcoming budget? | BBC Newscast

Key Concepts

• Cost of Living Crisis: Ongoing challenges with high food prices and energy bills in the UK.
• Budget Speculation: Anticipation and discussion surrounding the upcoming UK budget.
• Institute for Fiscal Studies (IFS): An independent research institute that analyzes public finances and the economy.
• Green Budget: The IFS's assessment of the economic challenges and fiscal situation facing the government.
• Groundhog Day Analogy: Used to describe the recurring need for tax rises or spending cuts due to economic forecasts.
• Office for Budget Responsibility (OBR): An independent public body that provides economic forecasts and assesses public finances.
• Fiscal Rules: Government-set targets for managing public finances.
• Headroom/Buffer: The margin of error or flexibility within fiscal rules.
• Tax Gap: The difference between the tax that should be collected and the tax that is actually collected.
• Net Zero: The UK's commitment to reducing greenhouse gas emissions to net zero by 2050.
• State-Related Activity: Espionage, cyber threats, and other actions undertaken by state actors.
• Sub-threshold/Gray Zone Hybrid Warfare: Actions by states that are disruptive but do not constitute an act of war.
• Artificial Intelligence (AI): A rapidly developing field with significant implications for national security and the economy.

Economic Outlook and the Upcoming Budget

The UK is currently facing persistent challenges with the cost of living, characterized by high food prices and energy bills. Ahead of Chancellor Rachel Reeves' budget on November 26th, speculation is rife regarding potential government actions. Two key events are shaping this discussion: international economic meetings in Washington D.C. and the publication of the Institute for Fiscal Studies' (IFS) "green budget."

The IFS Green Budget and the "Groundhog Day" Scenario

Helen Miller, the new director of the IFS, explained that their "green budget" highlights the fiscal challenges Rachel Reeves will likely face. The headline concern is the "danger of Groundhog Day," a metaphor for the recurring situation where the government is forced to consider tax rises or spending cuts.

• Reasoning for "Groundhog Day": This scenario arises because the Office for Budget Responsibility (OBR) is expected to downgrade its economic growth forecasts. This downgrade, combined with past policy U-turns and increased government borrowing costs (though recently decreased), creates a further squeeze on public finances.
• OBR Forecasts: The OBR's reassessment of long-term economic growth is a significant factor. Previous predictions have not materialized, impacting the "budget maths" and reducing the government's room for maneuver.
• Need for Action: The IFS suggests that Rachel Reeves will likely need to either cut spending or raise taxes to ensure that revenues meet day-to-day spending in the coming years.

Efforts to Improve Fiscal Stability

There is a recognition within the Treasury that the constant cycle of budget adjustments and commentary on economic fluctuations is detrimental to stability. This "Groundhog Day" scenario negatively impacts consumer and business confidence. Consequently, there are discussions about changing the "processology" around budget forecasting to provide more certainty. This could involve:

• Tweaking Forecast Operations: Modifying how economic forecasts are generated.
• Increasing Buffers: Enhancing the financial buffers or "headroom" against fiscal rules, which are currently very tight by historical standards.

The Impact of Forecast Frequency

The IFS proposes that reducing the number of OBR forecasts per year from two to one could simplify Rachel Reeves' task. However, Helen Miller argues this is not a complete solution and would be a "huge blow to transparency," removing vital information from public debate and parliamentary scrutiny. She also notes that even without a spring forecast, the government could still face similar pressures in the next budget.

Headroom and Fiscal Rules

Rachel Reeves is operating with extremely limited "headroom," estimated at around £9 billion. This is a minuscule amount in government terms, akin to forecasting the value of a house within a £1,000 accuracy over several years. This lack of wiggle room means that even minor, ordinary forecast changes, such as those the OBR is expected to make, can necessitate significant policy adjustments. The IFS points out that such forecast revisions have occurred at least eight times since 2010, highlighting that the current situation is not unusual but rather a consequence of insufficient headroom.

The £22 Billion Fiscal Gap

The IFS calculates that Rachel Reeves might need to implement a combination of spending cuts or tax rises totaling approximately £22 billion to meet her fiscal rules and maintain the same level of headroom as last year. If she aims for greater headroom, the required amount would be higher.

• Potential Tax Rises (without breaking manifesto commitments): The IFS suggests that it is mechanically possible to raise £22 billion without increasing National Insurance, Income Tax, or VAT. Potential sources include:
  • £5 billion from Council Tax.
  • £5 billion from Inheritance Tax.
  • £5 billion from reducing the "tax gap" on corporation tax for small companies.
  • A few billion from taxes on banks or "sin taxes" (e.g., on tobacco or alcohol).
• Challenges: While mechanically possible, these measures would not be easy. Even small tax increases, like the one on farmers last year, can generate significant political heat. The IFS emphasizes that the focus should be on the "best measures" rather than simply finding money. Some existing taxes are poorly designed and can negatively impact growth if increased.

Alternative Perspectives on the Fiscal Gap

Fisel Islam, reporting from Washington D.C., notes that some observers have estimated the required fiscal adjustment to be higher, perhaps £30 billion or more. However, based on conversations at the IMF meetings, the mood music suggests the situation, while not ideal, is not as dire as some predictions. This might explain why some seemingly unlikely options are being discussed, and the Chancellor is attempting to shift the conversation away from solely tax rises.

Rachel Reeves' Stance and Targeted Action

In an interview, Rachel Reeves reiterated her commitment to her manifesto promises not to increase National Insurance, Income Tax, or VAT. She also emphasized that the budget will be used to help contain inflation.

• Inflation and the Budget: The IMF forecasts that UK inflation will remain the highest in the G7 this year and next. Reeves stated that the budget will involve "targeted action to deal with cost of living challenges" and will be a shared effort with the Bank of England.
• Government's Role in Inflation: The government aims to "bear down further on some of the causes of inflation." This is understood to specifically target regulated prices, particularly energy bills.
• Potential Energy Bill Interventions:
  • Removing Search Charges: Taking off various charges that contribute to energy bills.
  • Cutting VAT on Energy Bills: Reducing the current 5% VAT rate on energy. This is considered a significant option, especially given the tight fiscal situation.

Economic and Tax System Contradictions

Helen Miller expressed concern about cutting VAT on energy bills, highlighting existing contradictions within the tax system.

• Net Zero vs. VAT: Taxes on electricity are currently used to fund renewable subsidies and support the net-zero agenda. Simultaneously, a lower VAT rate on energy acts as a subsidy. This creates conflicting incentives.
• Impact of Further VAT Cuts: Further reducing VAT on energy would increase the subsidy and make the VAT system more complex, moving in the "wrong direction" from an economic perspective.
• Alternative: Reducing Renewable Subsidies: Miller suggests that reducing taxes on electricity used for renewable subsidies could be a more considered approach, but this should be done in conjunction with a clear vision for achieving net-zero goals through the tax system.

Persistent Inflation and Economic Growth Concerns

Fisel Islam noted that the cost of living crisis, while perhaps less prominent in headlines, remains a significant issue due to persistently high prices. Inflation in certain sectors, like food, is reportedly rising again.

• Psychological Impact of Inflation: High inflation in the recent past (10-11%) means that even a current inflation rate of 3.5-4% can trigger psychological concerns. This can lead to demands for higher wages and price increases, potentially reigniting inflationary pressures.
• Slowing Economic Growth: The IFS also warns of slowing economic growth for the remainder of the year.

Explaining UK Inflation and Productivity

The government is keen to address the question of why UK inflation is higher and growth has been sluggish.

• OBR Forecasts on Productivity: The OBR is expected to detail reasons for downgrading productivity forecasts, attributing blame to historical issues, including trading arrangements (potentially mentioning Brexit).
• Government's Strategy: The government is choosing to "lean into" this argument, suggesting that these issues reflect policies under the previous government. They are also reportedly urging the OBR not to focus on current policy impacts, such as those related to planning or artificial intelligence, until the economy is in a stronger position.

The OBR and Political Dynamics

There is a degree of "annoyance" with the OBR from some within the Treasury, particularly given their role in providing forecasts that can constrain government policy. The current process is proving "quite tricky." Ministers are already attributing economic challenges to their "economic inheritance from the last government," a tactic that echoes past political rhetoric.

Breaking Out of "Groundhog Day"

Helen Miller emphasizes that to escape the "Groundhog Day" cycle, the government must "do something different." This means avoiding repeating past mistakes, such as leaving insufficient headroom or tying hands on tax policy. Doing the same things again increases the likelihood of facing similar fiscal challenges in the future.

Security Threats and China

The second part of the podcast shifts to national security, with a focus on the annual speech by the Director General of MI5, Ken McCallum.

MI5 Director General's Annual Speech

Ken McCallum delivered his annual speech to security journalists, addressing the security threats facing the UK. The speech was delivered against the backdrop of controversy surrounding a collapsed Chinese spying case.

• Amended Speech: It was noted that McCallum's speech had to be amended more than once due to significant events, including the Manchester synagogue attack and ongoing discussions about China.
• Sympathies: McCallum expressed sympathy for those affected by the Manchester synagogue attack.

The UK-China Relationship

McCallum acknowledged the complex nature of the UK's relationship with China, recognizing it as a significant trading partner and investor.

• Economic Interdependence: A large portion of everyday goods and technology are sourced from China, making complete disengagement difficult.
• Daily Threat: Despite economic ties, McCallum stated unequivocally that "Chinese state actors present a daily threat to UK national security." This threat manifests in cyber espionage, hacking, and attempts to extract secrets from academics.
• MI5 Interventions: MI5 has intervened in plots originating from or related to China. McCallum did not provide details but indicated these interventions were operational and not directly linked to the recent spy trial controversy.

Approach to China vs. Russia

There is a distinct difference in how the UK views Russia and China.

• Russia: Relations with Russia are described as being at "rock bottom."
• China: The UK adopts a "paradoxical twin approach" with China. McCallum believes that engaging in dialogue and confronting China on unacceptable actions is more effective than simply working against them or being fearful.
• China's Strengths: China possesses a vast workforce in IT, intellectual property, and AI, areas where it is in a "full head-on race" with the United States.

Artificial Intelligence (AI) and Future Threats

McCallum touched upon Artificial Intelligence (AI), noting its increasing importance. He anticipates future discussions about Artificial General Intelligence (AGI), where AI surpasses human intelligence. While his remarks on AI were general, the race between China and the US in this field will have implications for the UK.

Increased State-Related Activity

The thrust of McCallum's speech highlighted a significant increase in "state-related activity" against the UK. This includes threats from Iran, Russia, and potentially China, moving beyond the traditional focus on lone wolf terrorists or networks like Al-Qaeda.

Russian Espionage and "Sub-threshold" Warfare

The podcast revisits the issue of Russian espionage, with a comparison to Cold War levels.

• Covert Acquisition: Russia continues to go to great lengths to acquire information covertly, even when details are publicly available online.
• "Sub-threshold" or "Gray Zone Hybrid" Warfare: Following the invasion of Ukraine, Russia is engaging in actions against the West that are disruptive but do not constitute an act of war. Examples include probing undersea cables, mysterious drone sightings at airports, and cyber probing. These actions aim to make life uncomfortable for Western nations without being directly attributable as acts of war.

Ken McCallum: The Person

Despite the serious nature of his role, McCallum is described as "personable" and "very human." He is "MI5 born and bred," having risen through the ranks of the organization. His public statements are precise and carefully weighed, as he speaks infrequently. His delivery is typically serious and from a prepared script, but he relaxes when taking questions. The podcast speculates on how someone in his position manages the immense pressure and the disturbing information they must encounter.

MI5's Commitment to Evidence

McCallum's background within MI5 is seen as a reassurance that the organization will not shy away from presenting evidence for prosecution against state threats, regardless of political considerations.

Breaking News: Trump-Putin Talks

As the podcast concludes, breaking news emerges from Washington D.C. regarding a two-hour phone call between Donald Trump and Vladimir Putin. They have reportedly agreed to face-to-face talks about Ukraine in Hungary in the near future. Marco Rubio, the Secretary of State, is expected to initiate discussions with the Russians next week.