Chancellor Reeves ‘wrapping herself in a straight jacket’ ahead of Budget

New chancellor Rachel Reeves is “wrapping herself in a straight jacket” as she tries to balance reassuring the public with reassuring the market ahead of the 30 October Budget, political journalist and broadcaster Nick Watt has warned.

During his keynote speech at Money Marketing Interactive in London today (8 October), Watt said Reeves is faced with a conundrum: how does she rebuild the public realm while maintaining her reputation for fiscal prudence as she tackles the £22bn black hole she identified at the end of July?

He said that, on the one hand, the chancellor is reassuring voters by ruling out any increases in the three big revenue raises of income tax, VAT and National Insurance.

At the same time, she is reassuring the market by showing what she describes as “ironclad fiscal discipline”.

“Firstly, she aims to ensure no borrowing for day-to-day spending in the long run. Secondly, she plans to reduce debt as a share of GDP between the fourth and fifth years of the forecast,” Watt added.

“This commitment restricts her ability to borrow for investment, and if she sticks to this approach, she will need to cut spending in unprotected areas to maintain spending in protected areas like the NHS.”

He said Reeves is “clear in her desire” to rebuild the public sector “without reckless spending”.

“This raises the question of what she will do in the Budget with such tight restrictions. It appears there are two major tax proposals the government is focusing on.

“The first is clamping down on non-domiciled individuals, and the second involves removing the business-rate exemption for private schools.

“However, there are now doubts about how quickly these will be implemented.”

Watt said that if there are uncertainties about these two proposals, which are expected to raise several billion pounds, this “raises the question” of what else the chancellor might consider to generate revenue.

“Options could include raising the rate of capital gains tax, altering pension rules or increasing inheritance tax,” he said.

“A key issue drawing attention is whether she will find a way to ease the fiscal rules.”

Watt suggested one option for doing this could involve counting Bank of England debt differently by excluding losses from asset sales and policy banks.

Another suggestion, from the IPPR – a think tank favoured by Number 10 – is to target public-sector net worth as the debt measure.

“This approach could unlock £57bn of investment,” Watt added. “That approach means that you take account the value of public assets, like roads, schools and hospitals.”

But, he warned, this is “difficult to define”.