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Andrew Sentance is an independent business economist and former member of the Bank of England's Monetary Policy Committee
'If you are in a hole, stop digging.' This advice was famously offered by Denis Healey to one of his successors as Chancellor of the Exchequer and has since become known as Healey’s First Law of Holes.
And it is advice that Rachel Reeves should pay serious attention to as she prepares to deliver her autumn Budget in the next few days.
There is no doubt that the current Chancellor is in a hole.
This was confirmed by the latest figures for public borrowing announced by the Office for National Statistics on Friday. In the first seven months of this financial year, she has already borrowed nearly £117billion - exceeding the amount she was projected to borrow by around £10billion. Total borrowing in this financial year is now likely to exceed £140billion – around £5,000 for each household in the UK.
Despite the Chancellor raising employer National Insurance and other taxes in her last Budget, spending is increasing faster than tax receipts.
The roots of this problem go back to the Chancellor’s first Budget in October last year when she boosted spending totals by around £100billion or more from 2025-26 relative to the plans of her Tory predecessor, Jeremy Hunt.
As Healey discovered in the 1970s, large increases in public spending add to borrowing and require higher taxes.
Both lead to slower growth and higher inflation. In Healey’s case, his high spending and borrowing resulted in a full-blown economic crisis which came to a head in 1976 with a request for IMF financial support.
If Rachel Reeves wants to avoid a similar fate, she needs to take action to stop digging in this Budget.
The Chancellor’s Budget gap has been estimated by City forecasters at £20billion to £30billion if she is to keep to her fiscal rules – but it could be higher.
Rachel Reeves appears to have ruled out an across the board tax rise such as a 2 pence rise in income tax rates.
That leaves her with two main options. The first would be to put together a complex package of smaller tax changes which will build up to the required revenue total, what has been described in the media a as Smorgasbord Budget.
The second alternative would be to announce a reduction in public spending plans which would build up to £20billion to £25billion over the remainder of this Parliament – ie the next three to four years.
Coupled with a few elective tax changes aimed at raising £5billion to £10billion such a Budget could reduce borrowing by £30billion or more.
To achieve this, the required public spending savings would amount to a less than 2 per cent of the £1.4 trillion the government will be spending annually (excluding debt interest) in four years’ time. That should not be a major challenge for well-run government departments.
The Chancellor should not get into the detail of how these public spending savings can be achieved – that is for departments to decide.
Required savings should be spread evenly across departments, which should be tasked with achieving them without negatively affecting the delivery of public services and legitimate benefit entitlements.
To save money, departments should also be encouraged to look at sales of property and land as well as the opportunities created by Artificial Intelligence.
In the private sector, cost-saving programmes routinely deliver 5 per cent to 10 per cent annual savings, so the UK government should not have too much difficulty in delivering a 2 per cent saving as part of this Budget.
There might be howls of protest from the Labour backbenches, but the Chancellor should not be deflected by this. She is in a hole and should stop digging.
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