Introduction

In her upcoming Budget scheduled for October 30, Rachel Reeves, the Chancellor of the Exchequer, faces a daunting task. She must not only inspire hope within her party and the nation but also lay out a credible plan for economic growth amidst significant structural weaknesses in the UK economy.

Key Objectives of the Budget

Reeves' budget must address four critical areas:

1. Instilling Hope: Providing reassurance to both her party and the public that better economic times are ahead.
2. Improving Public Services: Ensuring that public services see enhancements without compromising fiscal constraints.
3. Navigating Constraints: Balancing Labour's commitments with the realities of the UK's economic vulnerabilities.
4. Credible Growth Narrative: Presenting a believable strategy for stimulating economic growth; without this, other initiatives may falter.

Economic Context

The Green Budget 2024 from the Institute for Fiscal Studies highlights pressing issues within the economy. Notably, Benjamin Nabarro from Citi points out that:

• UK economic activity is 36% lower than it would have been if it had continued its growth trajectory from 1997 to 2008.
• Comparatively, the Eurozone's shortfall is 31%, and the US stands at 24%.
• Current GDP levels are significantly below even the already poor performance observed between 2014 and 2019.
• Alarmingly, the average growth of potential GDP per worker over the last decade is zero, marking the lowest rate in over 150 years (excluding post-war impacts).

Short-term vs Long-term Outlook

While there may be potential for short- to medium-term improvements—especially as inflation stabilizes and monetary policy eases—the long-term outlook hinges on achieving higher trend growth. In a stagnant economy, increased spending in one area necessitates cuts in another, complicating political decisions and contributing to government unpopularity.

Addressing Structural Vulnerabilities

The Chancellor must also contend with immediate and structural vulnerabilities:

• Public Debt: Ratios nearing 100% of GDP and long-term gilt interest rates exceeding 4%.
• Twin Deficits: The UK grapples with both fiscal and current account deficits, where an increase in fiscal deficit could exacerbate current account issues, necessitating greater foreign savings inflows.

Confidence in Economic Stability

Confidence from foreign investors is crucial but unpredictable. It hinges on:

• The government’s perceived credibility and stability in political affairs rather than specific deficit or debt figures.
• The UK’s lack of a significant reserve currency makes it reliant on foreign savings, complicating its economic recovery efforts.

A Multidimensional Approach to Growth

Given these challenges, Reeves' budget must adopt a multidimensional strategy:

• Any borrowing increases should align with long-term fiscal policies and growth plans.
• This will likely necessitate tax reforms and potentially higher taxation rates while addressing external deficits through increased savings—possibly via higher pension contribution rates.

Encouraging Investment Without Sole Reliance on It

To escape its low-growth trap, the UK must pursue avenues for growth that do not solely depend on increased investment. Potential strategies include:

• Relaxing Planning Controls: Streamlining regulations to facilitate development.
• Deregulation: Carefully considered deregulation can spur business activity.
• Promoting Innovation: Enhancing support for innovation is vital, particularly given current productivity challenges. Initiatives like the Advanced Research and Invention Agency could play a pivotal role in this regard.

Conclusion

The UK's path out of its low-growth trap is fraught with challenges due to underlying structural weaknesses. The true test for Rachel Reeves will be her ability to navigate immediate pressures while crafting a sustainable strategy for long-term economic recovery. The future of the UK economy depends on her success.