There might be three weeks to go until Rachel Reeves presents her budget, but in the topsy-turvy wonderland of the budget process, the real drama happens in the next few days. The chancellor will have to submit her major decisions to her official forecaster, the Office for Budget Responsibility (OBR), this week. This means no more discussion, debate and seat-switching between No 10 and No 11 – once the spreadsheet is sent it is rarely changed. I hope that it includes an increase in the basic rate of income tax, something we haven’t seen since the 1970s. It is hard to see how else Reeves can navigate the three trials of this budget: fixing the bottom line, supporting growth and distributing the pain fairly.
First, the hole in the public finances must be filled. New Resolution Foundation analysis estimates that borrowing is on course to be £14bn higher than it was in March – enough to break her fiscal rules. That’s smaller than some have speculated but still leaves a mountain to climb. And the chancellor will need to do more than match this shortfall – and build a far stronger financial buffer against her fiscal rules – if she is to reassure the markets and avoid coming back for even more tax rises or spending cuts at the next budget. Doing so would be unusual – typically chancellors under-react to bad economic news and overreact to good news. Only one budget in the past 14 years has responded to a worse underlying forecast by more than making up for the deterioration (George Osborne, in 2012).
