Institue for Fiscal Studies (IFS) director Paul Johnson said there is likely to be more ” pressure” on the chancellor’s Spring Statement. (Alamy)
3 min read
Movements in the markets will put “pressure” on Rachel Reeves to deliver a major fiscal event in the spring, despite the chancellor having committed to just one a year, leading economist Paul Johnson has said.
The pound fell to its lowest level since November on Thursday, while the cost of borrowing has risen sharply.
The latest developments in the markets have raised questions about the government’s ability to meet its own fiscal rules, and whether Reeves will be forced to further raise tax or cut spending.
In a move on Wednesday night seen as an attempt to calm the situation, a Treasury spokesperson said: “No one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances.”
On Thursday Darren Jones, chief secretary to the Treasury, told MPs “UK gilt markets continue to function in an orderly way” and “underlying demand for the UK’s debt remains strong”.
As things stand, Reeves does not plan to hold a major fiscal event involving tax and spending decisions until the autumn. After becoming chancellor of the exchequer, Reeves said she planned to hold one major fiscal event a year, in the autumn, in a break from the previous Tory government’s policy of holding two every year. On 26 March Reeves plans to provide an update on the nation’s finances.
However, Director at the Institute for Fiscal Studies (IFS) Paul Johnson predicted the chancellor would face pressure to make a more significant statement in late March as a result of what has happened in the markets in recent days.
“Reeves has said that the spring statement will literally just be a statement of where the public finances are,” he told PoliticsHome.
“If you take that seriously, that means significant tax changes in the spring are off the table.
“But I wonder whether this could actually turn into a serious fiscal event after all.”
The IFS economist said there was a “real sequencing problem” with the current approach because “everything is going to fall on the spending plans” meaning ministers will come under pressure to cut departmental budgets as a way of ensuring stability.
“There’s more likely to be pressure on the spring statement to become a budget if the government doesn’t want everything to fall on tighter spending,” he said.
Opposition parties have called on Reeves to cancel a planned trip to China and stay in the UK to deal with the economic situation.
“The Chancellor should now cancel her travel and focus on this country instead,” said Mel Stride, Tory shadow chancellor.
Liberal Democrat leader Ed Davey said Reeves “should urgently come before the House of Commons” rather than go ahead with plans to meet her counterpart in Beijing.
However, Johnson told PoliticsHome he did not believe a statement from Reeves would achieve much, and may exacerbate the issue.
“My instinct is: no, she doesn’t need to, and shouldn’t do,” he said.
“In a way, the Treasury has already done more than it would normally do in the sense of having put out a statement saying we’re committed to our fiscal rules…
“There’s almost a risk [a chancellor statement] will be seen as an overreaction to what are significant market moves, but not ridiculous.”
He added that while significant, what has happened in the markets in recent days was not as serious as when former prime minister Liz Truss’ fiscal event triggered economic instability.
“It’s not like the Truss moment when specific government policies were leading to a specific market reaction which was immediately very dangerous. That’s not where we are.
“The moves have come significantly, but not off the back of any one-day event.”
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