You are probably tired now to hear everything about “black holes”.
This is one of those sentences trotted by journalists in order to make economic policy a little more interesting. And in some directions, it is a massively misleading image.
After all, when people talk about tax holes, what they really talk about is something rather prosaic: the amount of money it would be necessary not to break it tax rules.
These tax rules are not given by God, after all. They were conferred by the Chancellor herself. Missing them will not really make Great Britain to slip into infinite nothingness. Even so, whatever you choose to call the dilemma that she is confronted with at the moment, it is certainly a big problem.
And understand this helps to provide some context for extraordinary events of the last days, with markets slippery as a result of Ms. Reeves’ tearful appearance to the Prime Minister’s questions.
After this moment, the return on the debt of the British government – the interest rate that we are invoiced by international investors – Suddenly sautéed higher. Admittedly, the jump was nothing like what we saw following the mini-budget of Liz Truss. And these yields fell after the Prime Minister supported the chancellor.
The United Kingdom is a global aberrant value
Despite this, they highlight a very important context. The United Kingdom has become an aberrant value on the world debt markets. For years, the yield on our reference state obligations was more or less in the middle of the industrialized world pack. But since the drama of 2022, he has hovered over the G7 countries in an excessively high way.
This testifies to a broader problem. Great Britain may not have the greatest G7 deficit, or elsewhere, the highest national debt. Others (notably France, and to a certain extent too, the United States) are faced with even more desperate tax dilemmas in the years to come. But the markets always seem nervous about Great Britain.
It is perhaps because of what they (and we) all endured in 2022 – when the dominant British markets briefly crossed the precipice, provoking Dysfunction all around the financial system (especially in dark parties in the pension investment sector). But it also owes something to the fact that the Chancellor’s own tax plans are navigating in a disturbing manner near the wind.
Reeves manufactured FIscal rules matter
The main proof here is the quantity of latitude it has left against its tax rules. As I said at the beginning, there is nothing gospel in these rules. But having created them and struck them for a long time, even those of us who are a little skeptical about the budgetary rules would concede that breaking them, as they say, not a good look.
Back in the spring, the budget responsibility office thought that the chancellor had around 9.9 billion pounds sterling of latitude against these rules. But since then, she has returned to both Winter fuel payments cuts and on personal independence payments. This reduces the 9.9 billion pounds sterling just over 3 billion pounds sterling.
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But the real problem is not only these calendars. It’s something else. The stronger the economy, the more the tax revenues enter and the more its potential height is its tax rules. Similarly, if the economy develops less quickly than the expected OBR, it would mean less tax income and an even greater deficit.
And if you compare the latest OBR forecasts with the current average forecast among independent forecastists, or besides the Bank of England, they seem decidedly optimistic. If the OBR is right and everyone is wrong, the chancellor “only” must fill the hole left by these towers. But if the OBR is bad and everyone is right, things become much more macabre.
Even a small demotion of OBR expectations in terms of productivity growth – let’s say a drop of 0.1 point point – would erase the remaining margin and leave the chancellor with a deficit of 6 billion pounds sterling against his rule. Nothing more than that (and keep in mind, most economists think that OBR is more than that) and it could be 10 billion pounds sterling or more underwater.
Now there are a lot of very reasonable points that we could do on how silly this is. It is silly that so many people treat tax rules like stone shelves. It is silly that the government’s tax policy from one year to another seems to depend on the good or evil that the economic forecasts of the OBR are.
However, all these things, as stupid as all this might seem, is taken very seriously by the markets at the moment. They look at the United Kingdom, see an aberrant value and tend to focus more than usual on black holes. So I’m afraid that we were talking about “black holes” for a while to come.