Britain is on “thin ice” ahead of the crucial autumn budget, the Bank of England’s former chief economist said, warning the government should rein in public spending and refrain from painful tax rises.
Andy Haldane, who will serve on the central bank’s monetary policy committee until 2021, said in an interview with CNBC’s Steve Sedgwick that “dangers” loom over the budget update, currently scheduled for October 28.
“The truth is we’re skating on pretty thin ice financially,” Haldane said on the sidelines of a conference hosted by Britain’s Goldman Sachs 10,000 Small and Medium Enterprises. “If the ice cracks under our feet, nothing worse could happen, both economically and politically.”
Asked if the metaphorical ice would crack, he said: “There is a risk of that.” He added that the “single most effective way” to avoid such a situation is for the government to “appease financial markets” by showing it is “capable and willing to put a knife to public spending.”
“That’s the Achilles heel of this government,” Haldane told CNBC. “Unless action is taken on it, Chancellor Andy Burnham will unfortunately remain hamstrung by the bond market.”
Burnham, who replaced Keir Starmer as chancellor in the summer, has previously criticized Britain’s fiscal policy, saying it was “confusing” bond traders.
His emergence as the front-runner to oust Starmer spooked bond markets earlier this year, with investors perceiving him to be much more to the left than his predecessor.
Amid recent domestic and international instability, yields on British government bonds, known as gilts, have soared, making Britain’s government borrowing costs the highest in the G7.
“History is not on our side”
Mr Haldane said international bond markets were creating a “hostile environment for all government borrowers”, but said the UK was particularly affected because it was a “leveraged bet on the global economy”.
“Our inflation rate is higher and more sticky. Our growth rate is lower and more sticky. This century has not yet made ends meet. So history is not on our side. The facts are not on our side. That’s why the ice is thin.”
Mr Haldane said Mr Burnham’s efforts to abolish Britain’s so-called triple lock scheme – where the state pension is increased at the same rate as the highest rate of inflation and average earnings growth, or 2.5 per cent – was a “good first installment”. But he added that welfare remains a “totemic issue” for Labor and the bond market.
The gilt market came under pressure last year after Chancellor Rachel Reeves, Starmer, watered down her original plan to cut welfare spending after opposition from senior MPs.
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The upcoming autumn budget will be the Burnham government’s first, with Chancellor of the Exchequer John Healy telling the Financial Times last month that he wanted to create a fiscal “buffer against uncertainty”.
Mr Healy is tasked with managing public spending and borrowing as rising inflation, rising borrowing costs and slowing economic growth increase the urgency to balance the books.
But Mr Burnham and Mr Healy also said cost of living relief, devolving political power to local authorities and increasing defense spending remained priorities. The government has identified some savings to fund its defense programme, but Mr Burnham and Mr Healy have yet to spell out the full mix of further savings and tax measures needed to cover the extra spending while adhering to Britain’s so-called fiscal rules.
Prime Minister Burnham has not ruled out tax increases, and British media have reported that a windfall tax on banks may be under consideration.
Financial firms operating in the UK have lobbied against the proposal, and JPMorgan boss Jamie Dimon met with Mr Burnham and Mr Healy in London last month.
In an interview with CNBC, Haldane cautioned against targeting companies within their budgets.
“Most people would say that the big driver of growth is the private sector,” he said. “(But) there is a real sense that the private sector is being taxed. There is a sense that they are borrowing too much rather than too little, and so increasing the same amount was not the path to growth. I hope that’s starting to see a penny drop within the government.”
But Mr Haldane added that he believed the current government “really lacked economic and fiscal expertise”.
