A view from London

Second, greater headroom eases but doesn’t solve Britain’s debt problem. £22bn of headroom is less than set by previous chancellors and gives Ms Reeves just a 59% chance of meeting her fiscal rules, according to the Office for Budget Responsibility. In any case, meeting the fiscal rules would scarcely put a dent in the build-up of UK public debt, levels of which have nearly tripled since 2005. The budget forecasts that the ratio of net debt to GDP will end this decade close to an 80-year high. Last week’s gilt rally needs to be seen in the context of the UK having, since February, the highest borrowing costs of any G7 economy.

Third, the chancellor has foresworn austerity and committed the UK to historically high levels of government spending. In her two budgets Ms Reeves pledged about £80bn of extra public expenditure. Public spending is set to run around 44%-45% of GDP through the rest of this parliament, levels never seen outside recessions and wartime.

Fourth, last week’s £26bn of tax rises, together with last October’s £40bn tax increases, amount to about 2% of GDP – a bigger tax increase than seen in any parliament since the 1980s. By the end of this parliament taxes are forecast to account for 38.3% of GDP, the highest level since comparable records started in the early 1950s.

Fifth, the budget is unlikely to do much directly to boost growth. Richard Hughes, chairman of the OBR, said last week that none of the chancellor’s measures met the standard needed to raise the OBR’s growth projections. (The OBR has assessed previous government plans for investment, infrastructure and planning reform as being positive for growth.) In the longer run, a rising tax burden seems likely, if anything, to weigh on growth.

Sixth, last week’s cost of living measures, including freezing rail fares and lowering energy bills, will reduce inflation by about 0.4% next year. Inflation peaked in September at 4.0% and by the middle of next year is likely to be running at around 2.0%. Lower inflation is likely to pave the way for further interest rate reductions. We think the Bank of England will cut interest rates by 25bp to 3.75% at their next meeting on 18 December and by a further 25bp next spring.

The budget sets a course for higher public spending and higher taxes in a way that has, for now, steadied the bond market. Falling inflation and lower rates should help bolster activity. In the longer term, a rising tax burden and high levels of public debt pose their own very real risks.