Keirsplaining the budget: PM to the rescue?

Key Concepts

• Budget Justification: The debate surrounding whether the Labour party, specifically Rachel Reeves, exaggerated an "economic black hole" to justify tax increases.
• Office for Budget Responsibility (OBR): The independent body providing economic forecasts, whose market-sensitive documents were leaked, leading to an investigation.
• Migration Policy: The effectiveness of the UK's deal with France on deporting migrants, with low deportation numbers and high landing numbers.
• EU Relations (Defense Talks): The collapse of the SAFE agreement, a plan for UK companies to participate in EU defense loan schemes, due to disputes over financial contributions.
• Economic Reset: The broader efforts to re-establish economic ties with the EU, facing hurdles beyond defense, including issues with phytosanitary (SPS) deals.
• "Black Hole" Narrative: The Labour party's framing of the economic situation, the subsequent OBR forecasts, and the perceived discrepancy between the two.
• Welfare Spending: The significant cost (£12 billion) associated with welfare changes Labour was compelled to make due to party demands.
• Productivity Downgrade: A real economic factor impacting the budget, estimated to cost £16 billion.
• Investability of Britain: The perception among some wealthy investors that the budget did not harm the UK's attractiveness for capital and business.
• Manifesto Pledge: The debate on whether tax increases implemented by Labour constituted a breach of their manifesto.

Kier Starmer's Budget Defense and Opposition Criticism

Kier Starmer is scheduled to deliver a speech in central London, aiming to shift focus to the core purpose of the government's budget, emphasizing growth as a top priority. This comes in the wake of a budget that forecasts GDP downgrades for every future year until the end of the decade. Additionally, Starmer is expected to reiterate the importance of welfare reform, despite the budget requiring an expenditure of £12 billion due to welfare changes he reportedly resisted but was compelled to accept by his party.

Chancellor Rachel Reeves has been defending the budget, denying accusations of fabricating an "economic black hole" to justify tax hikes. Critics, including Conservative MP Kemi Badenoch, are maintaining pressure, calling for Starmer's resignation. The argument is that Starmer's speech, by aligning himself with Reeves's explanation of the budget's rationale, is also tying his fate to her version of events, particularly her dramatic statement on November 4th, which suggested income tax rises might be necessary. The core of the attack centers on whether Starmer was aware of the true nature of the OBR forecasts at that time.

Starmer's speech is anticipated to elaborate on welfare policies, potentially re-announcing Alan Milburn's commission focused on youth employment. The government aims to frame the budget as part of a national renewal, urging patience and highlighting cost-of-living support measures on energy, prescriptions, and rail fares, with the hope of managing inflation and encouraging the Bank of England to lower interest rates.

The Office for Budget Responsibility (OBR) Leak and Investigation

A significant development is the ongoing scrutiny of the Office for Budget Responsibility (OBR). The Treasury is set to receive the first report into how a copy of the OBR's market-sensitive budget document was leaked online 45 minutes before Rachel Reeves's speech. The Financial Conduct Authority (FCA) is also investigating potential market manipulation resulting from this leak. The head of the OBR, Richard Hughes, faces potential repercussions and a grilling by the Treasury Select Committee regarding the incident. While Reeves initially appeared sympathetic towards Hughes, it's understood she was defending the institution rather than the individual, leaving his future uncertain.

Migration Policy Ineffectiveness

The effectiveness of the UK's migration policy, particularly the deal with France, is being questioned. Since the treaty's signing on August 6th, only 153 migrants have been deported, while approximately 13,856 have landed in the UK. This stark contrast suggests the policy is not acting as a significant deterrent.

Collapse of EU Defense Talks (SAFE Agreement)

A less publicized but significant issue is the breakdown of reset talks with the European Union concerning defense. The SAFE agreement, which would have allowed UK companies greater involvement in the EU's €130 billion defense loan schemes, collapsed over a dispute regarding the UK's financial contribution. This is particularly ill-timed given the upcoming state visit of German President Frank-Walter Steinmeier. Germany was reportedly keen to facilitate the UK's entry into SAFE, but France insisted on a "Brexit tax" for UK participation, leading to frustration and indicating potential hurdles for broader EU reconnection.

Broader EU Relations and Economic Reset Challenges

Beyond defense, broader EU relations are facing difficulties. The UK's proposed youth mobility scheme has not materialized. The breakdown in defense talks is attributed to two main factors: France's insistence on a substantial payment and a wider debate among EU member states about the extent of the UK's monetary contributions for access to various funds. Furthermore, Ireland is reportedly unhappy with the progress on the phytosanitary (SPS) deal, which aims to reduce checks on agricultural and food imports from the UK to the EU. Ireland believes that work on implementing the Windsor Framework needs to be completed before further progress can be made on the SPS deal, suggesting a "go slow" approach. These issues cast doubt on the prospect of significant economic benefits from closer EU ties in the near future.

Number 10 Communications and Journalist Access

There are reports that Morgan McSweeney, a key strategist/chief of staff in Number 10, has been required to pledge not to speak directly to journalists again. The Prime Minister reportedly wants all communication with the press to be handled exclusively by the Number 10 communications team.

The "Black Hole" Debate: Reeves's Statements and OBR Forecasts

The central attack on the budget revolves around whether Kier Starmer and Rachel Reeves misled the public and cabinet by claiming a significant "economic black hole" necessitating tax rises, only to later present improved forecasts that allowed them to abandon those increases.

Timeline and Key Points:

• October 13th: Rachel Reeves, in an interview, publicly confirmed the existence of an "economic black hole" that could lead to tax rises. She attributed this to austerity, Brexit, and Liz Truss's mini-budget. At this point, the economic deterioration was estimated to be around £12 billion.
• OBR Forecasts: The OBR consistently overestimated UK productivity, partly due to Brexit, impacting forecasts.
• Reeves's Account: Critics argue Reeves provided a partial account of the challenges, omitting the £12 billion for welfare U-turns and the £12 billion needed for "headroom."
• Rhetoric vs. Reality: From October onwards, while forecasts improved, Reeves's rhetoric became increasingly dire. The "now notorious breakfast press conference" in early November, after improved forecasts, was when she signaled potential manifesto breaches.
• The £12 Billion Figure: This figure is central to the debate. It comprised:
  • £12 billion for economic deterioration.
  • £12 billion for welfare U-turns.
  • £12 billion for headroom.
• Nuance in Criticism: Some critics deliberately conflate the "economic black hole" with the total amount Reeves felt she needed to raise, which included the economic deterioration, welfare U-turns, and headroom.
• Real Economic Factors:
  • A genuine productivity downgrade cost the government £16 billion.
  • Labour did raise taxes on working people, which some believe broke their manifesto.
• The November 2nd Press Conference: Despite warnings of grim economic conditions, the numbers available on November 2nd already indicated an improvement, which did not change subsequently. This is where market participants perceive actual dishonesty.
• OBR's Role: The OBR's forecasts were available, and the Treasury's communication has been criticized for not aligning with these consistent forecasts, leading to a communication mess.

Positive Investor Perspective

Despite the political wrangling, a prominent figure in finance, investing on behalf of a major business family, offered a more positive outlook. This individual believes the budget did not further damage the UK's attractiveness to global wealth creators. Key points include:

• No further damage to non-dom tax status.
• No tax increases on banks.
• Talk of wealth and exit taxes was off the table.
• Expectation of inflation falling to around 2% within a reasonable timeframe.
• The belief that productivity might be bottoming out, suggesting potential for improvement.
• The wealthy and potential multi-millionaire targets felt reassured that the UK remains open to capital and business.
• No significant backlash from MPs or Labour MPs was observed.

Conclusion

The current political landscape is dominated by the fallout from the recent budget, with Kier Starmer attempting to reframe the narrative around growth while facing persistent criticism regarding the justification of tax increases and the handling of economic forecasts. The OBR leak has added another layer of complexity and scrutiny. Simultaneously, the UK's international relations, particularly with the EU, face significant challenges in areas like defense and trade, potentially hindering economic reset efforts. Despite the political turmoil, some in the financial sector perceive the budget as not detrimental to the UK's investment appeal, offering a glimmer of optimism for capital and business. The core of the ongoing debate remains the transparency and accuracy of economic communication from the government.