John Redwood: This Budget will tell us whether or not Reeves has learned her lesson

Sir John Redwood is a former MP for Wokingham and a former Secretary of State for Wales.

Labour in government started badly by claiming the economy was trashed and there needed to be a big tax raid to sort it out. When they took over inflation was on target at 2 per cent, unemployment had just hit a new decade low of 4.2 per cent, and growth was the fastest of the G7 for the first half of 2024.

The new government relied on people’s continuing anger about the high inflation of the Covid period, the rise in interest rates to control it, and the impact lockdowns had on growth to spread the word that the economy was in trouble. Instead, it was at last doing exactly what government wanted and was pointing in the right direction. Rachel Reeves soon changed all that.

The government discovered that if you talk an economy down you can help undermine confidence; i you threaten tax rises people and businesses put investments and larger purchases on hold; if you pass a big rise in the tax costs of employing people in a budget you destroy vacancies and put up unemployment; and if you impose new taxes on the better off and the super rich, many of them will leave or venture less and employ fewer people.

The run up to the budget started the troubles. Jobs decline and growth slowed. The budget itself took a cosh to family farms, small business, to energy-using industries, to employers, and to savers and investors. No wonder unemployment rose, vacancies fell sharply, and the public finances got worse.

The next budget will see if the Chancellor has learned this lesson or if she intends to go round the doom loop again. If she thinks another tax raising budget is what is needed to “stabilise” the public finances, she will find out again it is the last thing the economy needs. This time she cannot claim the need for tax rises has anything to do with the previous government, as she assured us she had dealt with her view of the borrowing overhang from the Conservatives with the large tax rises last time.

Unfortunately, at the same time as hiking taxes she added greatly to public spending, increased public borrowing, and relaxed the famous fiscal rules. Doing all that again could end in tears with the government bond market marking her budget homework with a big Fail.

Advice for the budget is easy to give: there can be no further relaxation of the fiscal rules, there has to be a determined effort to get the deficit this year and next under much better control, and there can be no more tax rises. (Indeed, in order to restore some growth in jobs and investment some of the tax rises she put through should be reversed.)

Reeves has to make this a budget to control spending. Her wild increases to pay for large public sector pay settlements without productivity improvements have to end. The public sector has to be challenged to deliver the higher productivity and quality it needs to provide, at least getting back up to 2019 levels quickly. They must know how to do that, as they did it six years ago.

The Chancellor was right to try to curb the fast growing welfare bill. She was wrong to target the winter fuel allowance for pensioners, and wrong to threaten existing claimants of disability benefit. She needs instead to turn government attention to the surge in housing, hotel, and benefit costs for illegal migrants, and tell her colleagues that the Treasury will not be paying for smart hotels and expensive living costs any more.

She needs to grapple with the way the DWP is allowing an extra 51,000 people a week to claim Universal Credit, and allowing many of them benefit for life as they do not require the people to seek work. This is bad for many of the claimants, bad for society, and bad for the taxpayer. The state is allowing far too many people to say they cannot work, when work can be part of therapy for those with mental illness, and worthwhile and possible for those with physical disabilities if properly supported.

It might be stretching her powers too far to get the Treasury to place controls over this government’s generosity to foreign countries, but it would be a good source of spending cuts.

Why is the government persevering with long term large sums going to Mauritius when we could keep the naval base for nothing? Why are we increasing payments to France to help stop the boats when all they do is allow more of them and conduct them at great expense into our waters? Why offer to make payments to the EU in order to increase our food imports from them? Isn’t it time to let countries like France catch up with the amount of money we have spent on helping Ukraine?

There are hints that at last my campaign to stop the huge Bank of England bond losses is under consideration in the Treasury and Bank. Please get on with it. This is self harm on an absurd scale: the OBR say the Bank plans to lose £257bn from late 2022 onwards and it is sending taxpayers bills for tens of billions each year. It makes even the welfare bills look modest. Not selling the bonds in the market at big losses would cut the bill they send to taxpayers.

So what could we expect? Reeves is an intelligent, well-educated woman. She should by now be able to understand the doom loop she has created. She must have forebodings that if she goes for more tax rises this winter there will be a further drop in confidence, jobs and growth. Far from stabilising the public finances, it would make them worse.

Here are some practical ways to start to control the welfare bill, reclaim some lost productivity, and put some commonsense back into the Bank. If markets saw big budgets like welfare and public services at last coming under control, then the interest rates would drop as well, removing the distrust premium the UK is currently paying thanks to the Reeves doomloop policies.

In recent days the cost of government borrowing has gone up to 5.56 per cent, a rise of 0.7 per cent and a 15 per cent higher rate than the worst one day peak in 2022. It is worrying that, as the Bank cuts base rate, the longer rates go up. The bond market do not believe the Chancellor has stabilised the finances – and a bad budget could push them up to even more damaging highs to force better controls on spending.

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