Economists have warned keeping to the fiscal rules will mean Ms Reeves will be forced to raise taxes in the autumn to keep within her fiscal rules, after the Government’s U-turn on its welfare reforms indicated it is politically too difficult to cut spending.
Kallum Pickering of stockbroker Peel Hunt said another round of tax increases by the Chancellor would mean the Bank of England “could go even further with rate cuts than it currently indicates”.
Money markets imply that there will be around three more rate cuts by the Bank by April next year, which would take the Bank Rate from 4.25pc to 3.5pc.
Mr Pickering said: “Tax hikes would depress demand and inflation.
“Assuming inflation is roughly back to target next year, the Bank of England should be able to offset any demand-slowing tax increases with easier monetary policy – from a Bank Rate of 4.25pc it has a lot of headroom to cut.
What is expansionary, what is contractionary, depends upon the balance of fiscal and monetary policy.
So, yes, closing the deficit does leave room for interest rate cuts.
This of course presupposes that tax rises would close the deficit – that they’d not just find new walls to piss it all up against. And how kucky do we feel about that?
The adults in government over the last 15 years (have there been any) need to take a little blame. Others have said we’ve had near 15 years of austerity, that public goods is what the public would like, that government doing things is best, that there’s multipliers from govt spending, that spending is investment.
And the adults never pushed back against any of this.
Occasionally an adult said we need to cut the deficit, someone else would shriek, and the adult would just give up and think I can’t be bothered arguing this