| It can’t have escaped your notice (assuming you’re in the UK, at least) that tomorrow is budget day. It’ll be quite hectic. Some budgets are boring affairs where the chancellor confirms a series of heavily-telegraphed taxing and spending measures, before yanking a tiny consolatory bunny out of an even tinier hat, in the hope that the bunny will grab a few sympathetic headlines. This is not one of those budgets. We’ve got a rough idea of what Rachel Reeves might announce tomorrow, but there’s plenty of scope for surprises, and as for bunnies — don’t hold your breath. Anyway, so the overall tone is a bit negative, and that’s unlikely to change tomorrow. Commentators (and hands up, I very much include myself in this category) will be falling over themselves to find the stealth taxes, the unintended consequences, the vicious details, the hidden losers — I for one, will be in full-on hypercritical mode and I make no apologies for that. With all of that in mind, I thought it would be a good idea, ahead of time, for me to have a think about what — within the confines of reality — would constitute a “successful” first budget, both for the government and for the rest of us. I’ve come up with three simple tests that should be broadly answerable by the end of play tomorrow, that I’ll use to guide my own view as to just how bad it is. Here goes. Three Budget Tests Not blowing up the UK gilts market: In the immediate term, one measure of success is avoiding the sort of bond market panic that followed the Liz Truss budget in late 2022. Now, in my view, this shouldn’t be hard. As I’ve said until I’m blue in the face, the main issue with Truss was that she came on fiscally strong at a time when the market had a massive structural hole in it (defined benefit pension funds owned financial products that forced them to sell UK government bonds to raise cash in a hurry, whether they wanted to or not). That specific fragility is gone. That alone would make me feel comfortable about the outlook. On top of that, the Labour party has attempted to make a lot of political capital from the Truss incident, so Reeves will presumably be very careful to avoid the same thing happening to her. Now, global bond markets are still edgy, for reasons that have little to do with the UK specifically and everything to do with generally very high levels of government debt, notably in the US (more from Marcus on that here). But I don’t expect fireworks. This should be an easy test to pass. Making the tax system less complex: In an ideal world it would be nice to have lower taxes altogether, especially given that the current tax burden is very high by UK historical standards. The idea that tomorrow will be a tax-lowering budget however, is delusional. What would be nice is if Reeves attempts to make the tax system less complicated. Complexity in itself imposes huge costs on any system. We recognize this overtly in most practical disciplines, because the objective is clear. No one wants to build an inefficient circuit board, or an unnecessarily circuitous plumbing system. It’s wasteful. But the virtues of a system only being as complex as it has to be are often neglected in social disciplines such as politics or economics. That’s because the underlying objective is often disputed (by reasonable people with differing views) or deliberately concealed (by special interests who want the system to work to their own agenda rather than the stated one). For example, one reason our pensions system is so complicated is because at an “honest disagreement” level, views differ as to precisely how retirement should best be paid for; while on the “underhanded politics” level, it’s simply a tempting pot of captive money for politicians to raid. From that point of view, the signs so far aren’t great. Raising employer National Insurance (NI) contributions seems to be a highly likely policy, for example, and it’s straight out of the “letter, not the spirit, of the law” obfuscation that has resulted in the messy, complicated system that we keep complaining about. It would have been fairer – in that it would fall on all employees equally, not just private sector ones – to have raised employee NI. It would have been even fairer – in that it would add all income sources to the mix – to have raised income tax. But those would have broken a manifesto promise in a way that only a lawyer could argue that raising employer NI doesn’t. That said, if Reeves even throws a few bones in this direction – getting rid of stamp duty on shares, say, or being even more radical and perhaps cutting the rate of inheritance tax while also slashing the number of reliefs it incurs (so that you raise more money but in a more transparent manner) – then I’d be inclined to give her at least some points on this one. Pragmatism wins over ideology: You can argue that hiking employer NI is unfair, but you can’t deny that it will raise money for the “black hole.” On the other hand, whatever your view on private schools, it’s highly questionable whether adding VAT to their fees will be a net positive for the taxpayer. That’s what I mean by pragmatism versus ideology. This matters. Other than everyone being exhausted by the Conservatives, one reason today’s Labour government got into power on a shallow (low popular support) but wide (loads of seats) majority, is because pre-election, they’d done a reasonable job of channeling the old “New Labour” energy, chatting up the City, and talking about nothing but growth. Since then, the “cool Britannia” duds have been binned and replaced with something that feels more like a hair shirt. If the budget turns out to be more focused on punishing certain sections of the electorate, and “investment” turns out to mean “spending on deserving pet projects,” that will confirm the concerns that have crept in since July 4. And from the wider market point of view — ie the impact on gilts and the like — this probably matters more than whatever new “golden rules” Reeves puts in place about exactly where debt-to-GDP should be by 2029. Because fundamentally, the exact decimal points on the debt don’t matter. But the business plan needs to be convincing. So that’s my three tests. I genuinely hope the budget passes them. Send any feedback, opinions or questions to jstepek2@bloomberg.net and I’ll print the best. If you were forwarded this email by a friend or colleague, subscribe here to get your own copy. - Could parts of the UK soon enjoy free electricity? Will Mathis reports on the battle lines being drawn up over dividing up the UK power market.
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