Ms Reeves is under enormous pressure to revise the fiscal rules, which are certainly arbitrary and are in serious need of redefinition. But the rules aren’t the real constraint on her actions. That role is taken by the financial markets. She can fiddle around with the fiscal rules until she is blue in the face, but the financial markets will see through her manoeuvres.
And if they don’t like what they see, they will impose a penalty in the form of higher gilt yields, which will result in increased debt service costs for the Government.
There is a mini-industry involved in devising various tax wheezes that can raise revenue for the Treasury while supposedly causing little damage to the economy. There are indeed bad and even worse ways of raising revenue, but there are no attractive options on the table. One option, apparently, is to widen the coverage of VAT. There is much to be said for doing this – but not at this particular juncture.
Given that we are still experiencing a bit of an inflation scare, which is inhibiting the Bank of England from reducing interest rates further, it would not be good to raise taxes through a measure that would increase the rate of CPI inflation.
Theoretically, such an increase would prove to be temporary. However, we know from previous experience that temporary spikes often become ingrained in the inflation rate, which then affects pay inflation and subsequently price inflation. This is not the time to take the risk of something similar happening now.
Similarly, considerable effort has been invested in estimating the savings from various cuts in government spending. There is a plethora of possible targets, including reducing the eligibility for various welfare payments, raising the age at which the state pension can be drawn, ending the triple lock on the state pension and many more.
However, it is widely believed that government spending has to be cut back considerably. We know that opposition within the Labour Party will prevent the Chancellor from doing this.
