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UK Chancellor Rachel Reeves Faces Daunting Fiscal Challenges

As the new UK chancellor, Rachel Reeves is tasked with bolstering economic output and avoiding steep cuts to fraying public services. In her first comments to staff, Reeves vowed to lead Britain’s most "pro-growth" Treasury and support the industrial strategy that Labour hopes will boost flagging investment.

Challenges Ahead

Reeves took office against a backdrop of stagnating per capita GDP growth, rising public debt, and a record-breaking tax burden. The formidable landscape contrasts sharply with the inheritance that awaited Gordon Brown when he took the same post in 1997.

Reeves has promised not to raise the main tax rates, which account for three-quarters of total tax revenue. Instead, she pinned her hopes on higher growth coupled with a narrow range of revenue rises worth around £8bn. However, with growth forecasts published in March by the Office for Budget Responsibility being more optimistic than the consensus, this could squeeze the Treasury’s budgetary headroom.

Limited Fiscal Headroom

The figure stood at less than £9bn in March, leaving Reeves with limited fiscal headroom for her first budget, expected in the autumn. "It’s not going to give her loads of money to spend significantly on anything," said Paul Johnson, head of the Institute for Fiscal Studies. "There may be a few extra billion knocking around if she gets lucky."

Industrial Strategy

Reeves wants the Treasury to focus on new ways of driving up growth, including driving growth "not just in a few pockets of our country but in every part of Britain." She also signalled that she wants the department to take on new challenges and new responsibilities.

Capital Gains Tax and Inheritance Tax

Labour is eager to find enough cash to avoid a fresh round of public sector austerity. Many analysts expect tax rises to be part of the solution, possibly capital gains tax or inheritance tax. Andrew Goodwin, chief UK economist at Oxford Economics, said the big fiscal question is whether the government sticks to its election manifesto or adopts a bolder approach given its large majority.

Bank of England Bond Sales

The public finances are also being weighed down by Bank of England bond sales as the central bank unwinds its quantitative easing programme. Analysts say the Treasury could gain extra budget space running into the billions of pounds if the BoE dials back those bond sales at its September meeting.

Conclusion

Rachel Reeves faces a daunting array of fiscal challenges as the new UK chancellor. With limited fiscal headroom and rising public debt, she will need to find innovative ways to drive up growth and avoid steep cuts to public services. The industrial strategy will play a crucial role in her plans, and Labour will be eager to find enough cash to avoid a fresh round of austerity.

FAQs

Q: What is Rachel Reeves’ plan to drive up growth?
A: Reeves has vowed to lead Britain’s most "pro-growth" Treasury and support the industrial strategy that Labour hopes will boost flagging investment.

Q: What are the main challenges facing Reeves as the new UK chancellor?
A: The main challenges facing Reeves are stagnating per capita GDP growth, rising public debt, and a record-breaking tax burden.

Q: Will Reeves raise the main tax rates?
A: No, Reeves has promised not to raise the main tax rates, which account for three-quarters of total tax revenue.

Q: What is the significance of the Office for Budget Responsibility’s growth forecasts?
A: The OBR’s growth forecasts are more optimistic than the consensus, which could squeeze the Treasury’s budgetary headroom.

Q: What is the Bank of England’s quantitative easing programme?
A: The Bank of England’s quantitative easing programme is a monetary policy tool used to inject money into the economy. The programme is being unwound, which is weighing down the public finances.

Q: How can the Treasury gain extra budget space?
A: The Treasury could gain extra budget space by the Bank of England dialing back its bond sales at its September meeting or by altering the definition of debt targeted by the Treasury.

Author: www.ft.com

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