Price range foundations beginning to wobble

Good morning. In yesterday’s newsletter I wrote that Rachel Reeves’ Budget rested on four unsteady pillars, all of which are highly likely to come tumbling down at some point before the election. As is often the way of things, over the course of yesterday, I realised that there are actually six unsteady pillars. Some thoughts on the other two, one of which has already started to wobble.

Ready to tumble

I wrote yesterday that the government’s increased headroom against its fiscal rules is based on an uneasy cocktail of experimental tax rises, tax rises that kick in at the end of the parliament, implausible reductions in spending and net immigration figures that are higher in 2029 than they are today.

But several of you pointed out that I hadn’t noticed another way that the government’s headroom is based on optimistic assumptions, which is that although the OBR has downgraded its forecasts for the UK’s employment rate, it has still assumed a relatively optimistic return to “normal” by the middle of the parliament.

Even comparatively minor fluctuations in this part of the forecast have potentially big impacts. This is part of why, as I wrote yesterday, I continue not to think that the problem is that Rachel Reeves has painted too downbeat a picture of the fiscal forecasts: the “surplus” that the OBR projected was £4bn, which is not even a rounding error!

Then there is another optimistic political calculation at the heart of last week’s Budget, which is already starting to come under strain: that inflation will continue to be the public finances’ friend. Inflation flatters the forecast because it means more people getting caught in higher tax bands and higher tax receipts. But that only improves the public finances if — and this is a planet-sized “if” in my view — you can avoid upward pay pressures from public sector workers and you can avoid ending up on the hook for greater numbers of people claiming benefits.

Throughout the world, whenever households experience increased economic hardship, they become more likely to claim benefits. Not just out-of-work benefits as you’d expect, but households in work become more likely to look at their straitened public finances and to make a claim. I don’t think it is the only reason for the rising number of disability and sickness benefit claims in recent years (I will return to those in a future newsletter), but that inflation is above target and we have high food price inflation is a contributor.

And inflation means greater pressure on people’s incomes and that in turn means there is more chance of increased trade union militancy and strikes by public sector workers for better pay. It’s again far from the only reason that resident doctors are going on strike again later this month, but it adds another incentive for clinicians to ask for higher pay and to go on strike to secure it.

It’s this pillar that is already wobbling, but as I wrote yesterday, I would be very surprised if all of them don’t come under obvious pressure sooner rather than later.

Now try this

This week, I mostly listened to this newish recording of Philip Glass’s Aguas da Amazonia while writing my column.

Top stories today

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