CAMBRIDGE – Here is an easy prediction: The budget that UK Chancellor of the Exchequer Rachel Reeves presents on October 30 will please almost no one. Yet the government’s first major fiscal initiative should not be judged on these terms, nor should those crafting the policy be assessed according to their ability to meet all the demands that have been placed on them. If they did that, the most likely results would be disappointing growth and financial instability.
Instead, this budget should be judged according to four criteria: the extent of its longer-term growth orientation; its approach to easing structural rigidities; the extent to which it simplifies an over-engineered fiscal framework; and whether these components are all properly communicated to the public. High scores across these four categories will bode well for both longer-term growth and genuine financial stability. Reeves can help bring to an end the United Kingdom’s prolonged period of under-investment, lagging productivity, crumbling public services, and worsening inequality of opportunity.
Let’s start with the bad news, though. Reeves inherited an unenviable brief. The UK’s fiscal position has been undermined by persistently large deficits, high debt, inadequate public services, considerable public-investment needs, and deep structural imbalances that hamper growth. This long list of problems not only increases the demands placed on the chancellor; it also severely reduces her operational flexibility, as do fiscal rules that her Labour Party further tightened during its election campaign.
The notion of a “first-best” budget in such circumstances is simply not feasible. Pushed by her fiscal inheritance deep into the second-best world, Reeves must ensure that the quest for some theoretical “best” does not get in the way of a more realistic “good.”
Read more here.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
