Will Rachel Reeves’ borrow-and-spend budget actually work?

Chancellor Rachel Reeves hopes her historic tax rises, combined with spending on the NHS and other investments, will boost the economy and bring Britain’s debt under control.

The level of her ambition and the size of the mountain she has to climb can be seen in the numbers. The UK’s debt stands at £2.7 trillion – an amount that will rise every year through the remainder of Parliament, with growth expected to be no more than 2 percent over the same period.

Ms Reeves plans to raise taxes by £40 billion, most of which will go to businesses. She will spend a further £22.6 billion on the NHS to get it back on its feet.

Paul Johnson of the Institute for Fiscal Studies said its risk is twofold.

“The first bet is that large cash injections into public services over the next two years will be enough to improve performance,” he said. If she gets it wrong, she’ll have to raise taxes again. If she gets it right, it could mean growth.

“This brings us to the second risk: that this additional borrowing will prove worthwhile,” he added.

Borrowing will be increased over the next four years from £59 billion a year to £85 billion a year, with funds earmarked for schools, hospitals and green energy projects. If that spending helps economic growth, her plan will work—but more debt means more debt payments.

In both cases, the speed of borrowing and spending raises big questions about profligacy.

“A lot depends on how well the government spends the money,” Mr. Johnson said. “Additional investment is being made on a first-come, first-served basis, which does not give me confidence in how effectively it will be spent – ​​if indeed it is spent in this time frame.”

In addition to setting ambitious investing and fundraising goals, Ms. Reeves wants the government’s revenue to exceed its spending within five years, a key indicator of whether the government is balancing its books.

The Office for Budget Responsibility said there is a 54 percent chance that this will happen during this period. He predicts an even higher chance that public sector net financial liabilities (PSNFL), a measure of debt, will fall as a share of the economy over the same period: 51 percent.

Given such large sums, this may seem like a reckless bet. But Ms. Reeves is right that she is ambitious if she wants growth, said James Smith, research director at the Resolution Foundation think tank.

“The scale of the tax and spending increases highlights the scale of the economic challenge the UK now faces. Reversing most of the implied cuts to public services built into the plans inherited from the last government would require the biggest ever tax rise budget.

“The Chancellor hopes the legacy of this Budget will be a £100 billion increase in public investment, which should boost the UK’s long-term growth prospects.”

If growth is coming from anywhere, it is coming from small UK businesses, some of whom feel they have been hit particularly hard by this budget.

Alice Wainwright has revealed that her coffee subscription company Rise Coffee Box has ambitious growth plans. “However, new measures threaten to stifle this momentum and force us to make difficult decisions next year,” she said.

“Increasing National Insurance for employers will prevent us from hiring the staff we need, and cutting business rates relief will put our plans to expand high streets on hold. We were hoping for one or two initiatives that would encourage small businesses like ours to innovate and grow, but instead we feel squeezed on all sides.”

Another challenge that will require more effort is getting more from the public sector, with the goal of increasing productivity by 2 percent annually.

Barrett Kupelian, chief economist at PwC UK, said: “This seems ambitious given the flat rate of net public sector productivity growth for at least the last decade – but perhaps achievable with a renewed focus on capital spending supported by the new fiscal rule ” on public investment.”

Harry Quilter-Pinner, interim chief executive of the IPPR think tank, said he was optimistic about Ms Reeves’ plan but the chancellor had to pull out of the job. “The new government inherited a terrible economic situation after years of crisis and mismanagement,” he said. “Today the Chancellor has taken important steps towards building a better Britain. But decades of economic damage cannot be reversed in one budget.”