Britain is a poorer country than it expected to be. This truth will shape Rachel Reeves's Budget on 26 November. After years in which chancellors benefited from the Office for Budget Responsibility's over-optimistic forecasts, the music has stopped and she has been left standing.
The UK's fiscal woes have deep roots. We last ran a budget surplus in 2000-01 when Tony Blair was still serving his first term as prime minister. The longest sustained period of economic growth in history allowed New Labour to raise public spending while keeping taxes low by European standards. The 2008 financial crisis ended that bargain and matters have only worsened since.
The OBR chart above shows what Reeves is contending with. Borrowing has consistently outpaced counterpart nations to the point where, by the end of 2024, the UK recorded the sixth-highest national debt, fifth-highest deficit and third-highest borrowing costs among 36 advanced economies.
All parties, to varying degrees, are now confronting this reality. In his speech on the economy in the City of London today, Nigel Farage will formally abandon Reform's past manifesto pledge to cut taxes by £90bn. "[We] will get public spending under control, so that the nation's borrowing costs come down," he will say. "Then, and only then, will I cut taxes to stimulate growth. We must get the economy growing."
What would real spending cuts look like? A recent report by Policy Exchange offers a snapshot. It calls for a three-year freeze in the state pension and the abolition of the triple lock; the removal of pensioner benefits such as winter fuel payments, free bus passes and free prescriptions from all but the poorest; the scaling back of childcare subsidies and free school meals; and the introduction of a £20 fee for GP appointments. Reform and the Conservatives - for all their purported radicalism - are not prepared to propose anything so contentious.
As chancellor, George Osborne adopted an 80:20 split between spending cuts and tax rises as he sought to reduce the deficit. Reeves, who intends to avoid a return to austerity, is taking the opposite approach.
Previously taboo options are under consideration: raising income tax and introducing new council tax bands for the most expensive homes. The latter, unrevised since 1991, have long been a symbol of Britain's fiscal unreality, as have historically low tax rates for most earners.
Something has to give. Other paths are available: the radical right champions a smaller welfare state for young and old; the radical left argues that the UK must abandon its great-power delusions and slash defence spending. But as long as Reform and the Tories remain more committed to cuts in theory than in practice, Reeves will be able to argue that her approach is the most credible.
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