When Rachel Reeves raised employers’ National Insurance in her first Budget last October, she said it was ‘to raise the revenues required to fund our public services and to restore economic stability’.
British business clearly didn’t buy it. Yesterday, an authoritative survey by the personnel officers’ body, the CIPD, showed that a quarter of UK companies are plotting redundancies ahead of the Chancellor’s £25billion tax raid taking effect in April.
Surging unemployment can only add to the Government’s catastrophic borrowing and debt problems by simultaneously reducing tax receipts and increasing the bill for benefits payments.
If this isn’t bad enough, public sector unions, granted inflation-busting rises by Rachel Reeves last July, at the cost of a whopping £9.4 billion to the Exchequer, are now demanding more.
NHS and other government employees complain that the 2.8 per cent rises offered by the Chancellor for the next financial year, starting in April, are not enough given escalating inflation. It’s yet another potential blow to the public purse from the very people Reeves bought off with her previous awards.
And we have not even got on to the demands from the Trump White House for Britain and other European Nato powers to ramp up defence spending.
The UK’s debt crisis has been building since Covid-19 brought our economy to a shuddering halt in March 2020. Matters have reached such a terrifying pass that Ray Dalio, a key City figure and the billionaire founder of hedge fund Bridgewater Associates, has warned that Britain under Labour is heading for a self-fulfilling ‘debt death spiral’ which can only get worse as time goes on.
This would mean that the Government, unable to make any dent in the money it owes, has to borrow just to pay the interest on its debts. Even more worrying, the interest rates it has to pay have been soaring because the all-powerful bond markets are jumpy since the Bank of England slashed its growth forecast and raised its projected inflation rate earlier this month.
A quarter of UK companies are plotting redundancies ahead of Rachel Reeves’ £25billion tax raid taking effect in April
The toxic combination of the botched Budget and the surging cost of Government borrowing has hit the public finances with a sledge-hammer. The debt management office, already facing the challenge of raising a stonking £311billion of borrowing in the 2024-25 financial year, potentially faces an even higher mountain of bills to pay in 2025-26.
The fiscal watchdog, the Office for Budget Responsibility (OBR), is warning that, just six months after her Budget, Reeves has used up all the £10 bn headroom –spare capacity for current spending – that she had allowed herself and is in grave danger of breaching her own fiscal rules, which allow her to borrow for investment but not for day-to-day spending.
As well as hammering business and consumer confidence, Reeves appears to be unable to contain spending, with the OBR pointing out last month that borrowing by local authorities and public corporations is spinning out of control.
When the then chairman of the OBR, Robert Chote, gave the green light to the nation borrowing record amounts during the Covid crisis – in what he described as ‘wartime conditions’ – he could never have dreamt that five years later the UK would be staring into a borrowing and debt abyss.
The contrast between the fiscal path chosen by Sir Keir Starmer’s administration and the last Labour government of Tony Blair could not be starker.
It is true that when Blair’s Chancellor, Gordon Brown, moved into the Treasury in 1997, he inherited a remarkably benign fiscal condition from the Tories, with the ratio of debt to GDP – the most common way of measuring national indebtedness – standing at 35 per cent of national output.
Even so, Brown decided he needed to raise new taxes to pay for pet projects, such as his youth employment programme. I recall Ed Balls, his chief economic adviser, telling me that it made no sense racking up government borrowing and the attendant interest rate bill when that cash could be better spent on education or the NHS.
He might have added that with more state debt and higher borrowing costs, less credit is available for business and consumers – a process known as ‘crowding out’.
As the next big date for the Chancellor looms, the Spring Statement on March 26, the Government finds itself in a debt-induced vice, writes Alex Brummer
Some 27 years later, Rachel Reeves will have found that the national debt had climbed to 98.8 per cent of GDP – the highest it has ever been in peacetime.
The scale of this debt mountain was the consequence of three huge shocks to the nation’s finances.
First was the implosion of the US sub-prime mortgage market that led to the Great Recession of 2008-09. This was followed by the titanic £255 bn hit to borrowing occasioned by the pandemic and the ruinously expensive furlough scheme it bred.
Finally, there was the massive bail-out of energy consumers in the wake of Russia’s invasion of Ukraine and soaring prices for fuel.
Despite this epoch-making series of blows, Britain’s debt pile remained lower than all its major competitors among the G7 richest nations, except for Germany.
Labour came to office promising to ‘fix the foundations’ after identifying a £22billion black hole in the public finances – a trope it has never tired of repeating. Yet despite imposing £40billion of extra taxes on people, the UK’s debt and borrowing burden has only worsened.
As the next big date for the Chancellor looms, the Spring Statement on March 26, the Government finds itself in a debt-induced vice.
Despite all the talk of growth in recent weeks, with pledges of a third runway at Heathrow and plans to turn the Oxford-Cambridge corridor into Britain’s Silicon Valley, none of this stands any chance of coming to fruition within the lifetime of this Parliament.
The final growth figures for 2024, showing the economy all but flat-lining in the final quarter, reveal the only thing holding the economy up is bloated public spending.
Growth will not bail the Government out of its mess and help it to meet its fiscal rules, or bring down borrowing, lower its interest rate bill and place the national debt on a sustainable path.
At the end of December, UK Government debt stood at £2.8 trillion. As one of the City’s senior investment bankers noted at a private dinner last week: ‘The big challenge for Reeves is debt, and how to get it down.’
The Chancellor naively backed herself into a corner on taxation, having told the the CBI that she wouldn’t be coming back for more taxes. She’s already clobbered enterprise with her £25 billion increase in NI contributions on employers.
The Treasury is insistent that the Government will not breach the target it has set itself of lowering debt by the end of this Parliament.
But achieving that aim is going to require savage cuts in the very public services that Labour vowed to repair.
Cackhanded management of the economy has created a doom loop of higher borrowing, a soaring government interest rate bill and exploding debt.
Britain no longer controls its own destiny.
If global buyers of UK government bonds or gilts lose faith in the ability of the nation to pay its bills, we could face an age of austerity as unrelenting as anything seen in the past.
