Today's inflation win can't hide the trouble ahead for Rachel Reeves

After a difficult few weeks, Rachel Reeves will be breathing a sigh of relief. While food price inflation increased, the headline drop to 3.6 per cent in October means the cost of living is not rising as fast as it was a year ago. It will also encourage the Bank of England to lower interest rates more quickly, which would, in time, help cut the cost of mortgages for millions of ordinary households. Easing the cost of living for ordinary families is right at the top of Rachel Reeves’ to-do list.

However, this good news does not change the fundamentals facing the Chancellor in her Budget in a week's time.

Frankly, the political demands of this Budget are irreconcilable with the economic demands of the bond markets. The public wants relief on the cost of living and more investment in public services, and all without paying higher taxes: impossible. Labour MPs want not just growth but also political direction, hoping that the Chancellor will symbolically scrap the two-child cap on benefits, which is driving child poverty.

However, the hard economic reality is that the bond markets need to be given confidence in the UK’s ability to keep spending under control and reduce debt. If bond markets are unconvinced, interest rates will rise, growth will stall, and all the things the public and Labour MPs want become harder to achieve. That is why these political demands cannot all be satisfied.

Perhaps the only policy that appears to be popular with the public, Labour MPs and the bond markets is to raise tax on online gambling. That is why it is one of the few certainties in next week's Budget. We at the Social Market Foundation have argued that a rise in Remote Gaming Duty, targeting online casinos, which are the most harmful forms of gambling, could raise up to £2 billion annually.

Having considered and then rejected a headline-grabbing plan to raise income tax, it appears likely that the Chancellor will instead opt for a pick-and-mix of smaller tax increases: scrapping tax incentives to invest in your pension or buy an electric vehicle, and raising taxes on landlords, second-home owners, and people living in wealthier homes.

This ‘smorgasbroad’ approach could help Reeves avoid raising taxes directly on working people. But such a complex mosaic of smaller tax increases is unlikely to tell a clear story about what the government stands for and, for that reason, may leave both voters and Labour MPs disappointed, even if the bond markets are satisfied.

____________________

BIO

LBC Opinion provides a platform for diverse opinions on current affairs and matters of public interest.

The views expressed are those of the authors and do not necessarily reflect the official LBC position.

To contact us email opinion@lbc.co.uk