The government borrowed £15bn more than expected in the year to March, according to figures from the Office for National Statistics released on Wednesday morning. This is nothing short of disastrous for Rachel Reeves, who is in Washington DC trying to roll back US tariffs which threaten to make the outlook even worse.
Inevitably, the chancellor is besieged by know-alls offering advice. She should tear up her fiscal rules, the Blue Labour group of MPs suggested this week. Maurice Glasman, the guru of the working-class faction, went further and proposed the abolition of the Treasury – complaining that Ms Reeves had become merely a “drone” for the overmighty finance department.
She should cut public spending, especially on welfare, say the Conservatives, even though they did not succeed in doing so themselves when they were in government. All the opposition parties complain about the “jobs tax” – the big increase in employers’ national insurance contributions, implying that it should be reduced, but they all run a mile from actually proposing an unfunded tax cut. The ghost of Liz Truss haunts this debate, and is likely to do so, justifiably, for many years to come.
Ms Reeves will ignore these suggestions, and she is right to do so. Those who are urging her to rewrite her fiscal rules are in effect calling for her to borrow more. But if higher-than-expected borrowing is the problem, it is hard to see how borrowing even more is the solution. The country is already borrowing an unprecedented amount and, while no one can be sure where the breaking point lies, that is not something a responsible government should try to find out.
Those who argue for deeper cuts in public spending are more realistic, but they have to face up to the fact that so many essential public services have been badly underfunded for a decade and a half now. Unless the state withdraws from some functions altogether – as it has just withdrawn, in effect, from providing foreign aid – there are no significant savings to be made.
The idea that cutting waste and inefficiency will yield vast sums is a mirage and always has been – as Elon Musk’s Doge, or Department of Government Efficiency, will no doubt confirm in the United States. It is always worth trying harder, if not going as far as some of Mr Musk’s counterproductive efforts, but efficiency savings are never going to shrink the state.
That leaves Ms Reeves with the unattractive but only viable option of raising taxes further. She is not going to make this argument, so we will make it for her: for all that she has raised taxes in this government’s first nine months, the overall tax burden in the United Kingdom is still markedly lower than in most of the main European economies.
In her interviews in Washington, she continues to insist that the government remains bound by its manifesto promises not to raise the main taxes on “working people”. But there is still some scope for further tax increases.
At the Budget in the autumn, Ms Reeves should have the courage of her Labour convictions and say that, in a changing world, with the global economy in a worse position than last year, she has to ask those with the broadest shoulders – who already bear the greatest burden – to carry a little bit more.
If there was ever a time to impose a windfall tax on big tech companies and banks, now would be that time. Raising income tax would be efficient and effective and would include higher earners.
Ms Reeves is doing broadly the right things. She is trying this week to secure a trade deal with the US that would lift the clamp of tariffs on growth. She has done what she can to relax the constraints on growth of the planning system. And there is hope of a deal with the European Union next month that could ease trade with the UK. That is a prize that should be seized urgently.
None of these is a magic wand, but there are no such things in the world of economics. All Ms Reeves can do, beyond those pro-growth measures, is to try to keep the public finances stable and sustainable in turbulent times. She must hold her nerve.
