Amid the many options open to her, and the need to win economic hearts and financial market minds, what might Reeves say? Here we look at three areas.

Labour’s ambitions for economic growth are well known. But can the government achieve this immediately through public sector investment? It’s unlikely. 

First, this form of investment invariably takes time. Large-scale projects especially take a while to start, and a recent Office for Budget Responsibility (OBR) paper concluded that most of the benefit from higher investment spending happens after five years. Second, practical resource constraints (like skilled labour) may limit the pace of growth in these projects. And finally, spurring growth requires public sector investment funding to be allocated efficiently, with large-scale projects running on time and to budget; recent experiences, like the HS2 rail project, provide grounds for caution. 

Some hefty tax rises are likely, but how these affect the wider ambition to spur investment, productivity and growth is an open question. 

So far this fiscal year, cash tax receipts have steadily declined, and the year-on-year growth rate fell from 14.1% in April to 8.2% in August. That deterioration is broad-based – across income tax, corporation tax, VAT as well as National Insurance Contributions (where tax rates were cut in the previous two Budgets). Spending in cash terms is slightly higher than at the start of the fiscal year (11.3% to 13.0%). But almost two-thirds of the rise in public spending (compared with the same period a year ago) reflects higher interest payments. 

Overall, we see a net loosening in borrowing relative to the March 2024 Budget baseline and a change to the fiscal framework.

Borrowing continues to overshoot, and fiscally orthodox pre-election rhetoric has given way to inflationary public sector pay awards. The outlook for issuance suggests substantial upward revisions of government borrowing are all but inevitable. 

We expect the Central Government Net Cash Requirement (CGNCR) – which informs gilt issuance – to be revised up to £185bn for the current fiscal year from £143bn in the March 2024 Budget; and to £160bn in the next fiscal year from £113bn. Aside from Covid and the Autumn Statement of 2022, this implies the largest in-year increase to gilt issuance from the Spring to the Autumn. 

Some dilution of the fiscal rules seems likely, possibly by changing how government income and debt are calculated and linked. The most obvious candidate is removing the Bank of England’s (BoE) Quantitative Tightening (QT) losses from the debt metric, and quite possibly, a move to a net liabilities or net worth measure. While this would create some fiscal headroom, it would result in larger deficits – because it would accentuate the impact of higher and more expensive borrowing.

But the potential rule changes are more than just about QT. We see two other notable options open to the Chancellor, who may choose to link public debt to:

• Public Sector Net Financial Liabilities (PSNFL): Targeting this broader measure of the government balance sheet, which includes less liquid assets such as the roughly £200bn student loan book, could create about £53bn (1.6% of GDP) of additional headroom. 
• Target Public Sector Net Worth (PSNW): This includes the estimated value of non-financial assets (such as public buildings, transport infrastructure). The Institute for Fiscal Studies (IFS) estimates this would provide fiscal headroom of around £58bn (1.8% of GDP). But this measure also adds complexity. Providing timely, reliable valuations of public sector assets is notoriously tricky. So too is knowing exactly what to include (such as unfunded public sector pension liabilities). 

Despite the fiscally conservative rhetoric the government campaigned on, this Budget is likely to bring about a sizeable increase in gilt issuance, not just in the current fiscal year but throughout the forecast period. Markets were slow to wake up to this risk, we think, but have become more concerned about the risks of fiscal slippage in recent weeks. In fact, 10-year gilts have now hit our long-held fair value target of 4.2%.  While the Budget is likely to bring more supply than demand-side concerns, the prevalence of overseas buyers may make yields notably sensitive to fiscal and political risks (as the gilt market learnt in 2022, when overseas investors stepped away meaningfully). If a sizeable overshoot in borrowing in the current fiscal year and over the remainder of the forecast period is combined with a meaningful dilution of the fiscal rules, overseas investors may well look elsewhere for a yield pick-up. 

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