Buying Time

Thoughts on why the UK budget may provide only temporary relief from bond vigilantes, how to address Belgian concerns over the reparation loan, and why peak Trump may not mean we are past peak danger

Photo by Aron Visuals on Unsplash

Apologies for the lack of a newsletter last Sunday. Here’s a mid-week one to make up. A warm welcome to new subscribers. Thanks as always to the generous paid subscribers whose support makes this worthwhile. I look forward as always to your comments and feedback. And please do email me if you have questions or ideas for future posts.

• UK Budget: Buying Time

• Ukraine Peace Plan: European Bystanders

• Peak Trump: Peak danger?

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1. UK budget

For all the sound and fury, the UK budget turned out to be something of a damp squib. For months, the press insisted it was a make-or-break moment for the prime minister and chancellor, Labour MPs fretted about manifesto-busting tax rises, Tories salivated at the possibility of a Liz Truss-style bond market meltdown while City investors were left to try to make sense of the non-stop - and frankly disgraceful - Treasury kite-flying that bordered on market abuse.

Yet what was striking was how limited it was in every sense. Sure, the press will tell you that the £26 billion of tax hikes was the third biggest budget grab since 2010 and that taxes are forecast to hit 38 percent of GDP by the end of this parliament, a record high. But the reality is that the tax rises are much less than anyone had expected. All that talk of wealth taxes, inheritance taxes, capital gains taxes, council tax reforms, taxes on banks and foreign student that consumed so much public debate right up until this week turned out to be so much hot air.

What actually happened was that the Office for Budget Responsibility rode to Rachel Reeves’s rescue with a far rosier fiscal forecast than anyone had anticipated, enabling the chancellor to duck hard choices. As I noted in a piece for Byline Times, the budget watchdog’s surprisingly upbeat forecast of higher tax revenues driven by higher wages and employment was enough to offset much of the impact of its previously announced downgrade to productivity forecasts to take account of the damage from Brexit and the global financial crisis.

As a result, the OBR reckoned that, even after accounting for the cost of U-turns on planned welfare spending cuts since last year’s budget, Reeves was still on track to meet her fiscal rules with £4 billion to spare. No wonder she was able to suddenly abandon her planned 2p rise in income tax just days after she had held a breakfast press conference to roll the pitch for it. As one wag put it to me, it was if the feared fiscal black hole had itself disappeared into a black hole.

That left Reeves not needing to do very much - and so she didn’t do very much. The story of the budget was that she scrapped the appalling two-child benefit cap - the bare minimum needed to retain the confidence of Labour MPs - and paid for it by freezing income thresholds for three more years from 2028, which she is betting is the minimum necessary to retain the confidence of the bond markets.

Alongside other smaller revenue-raising measures that will also not kick in for several years - including a new road pricing charge for electric vehicle drivers, a cut in tax perks for some pension savers, higher taxes on rents and dividends to bring them in line with other forms of income, and increased council tax for owners of more expensive houses - the OBR reckons that Reeves will meet her fiscal rules with £22 billion to spare. That’s double the headroom last year.

Nonetheless, this backdating of tax rises to pay for higher welfare today is not without risks. According to Deutsche Bank, 47% of the tax rises will not come until the last year of the current parliament. Investors are rightly questioning how credible these promised tax hikes are a year before a general election. After all, the freeze will hit poorer households hardest: according to the National Institute for Economic and Social Research (NIESR) real disposable incomes for households in the second-lowest decile are set to fall by nearly 5 per cent.

As I noted in my Byline Times piece:

Reeves will be hoping that an expected 0.4 percentage point reduction in inflation as a result of budget measures to reduce the cost of living will enable the Bank of England to cut interest rates faster than expected, while the increased headroom will convince the bond markets to reduce the one percentage point risk premium that they currently add to gilt yields. And of course, she will be hoping that something will turn up between now and 2028... As the OBR notes, an AI-driven productivity boom could give her more than £50 billion of headroom, giving her plenty of scope for pre-election giveaways.

Yet Reeves is leaving a lot to chance. Many economists are scratching their heads wondering how the OBR came up with such optimistic forecasts for employment and wages while remaining sanguine about the outlook for inflation and interest rates. What’s more, even her newly-increased headroom is only 75% of the average under previous chancellors, leaving her vulnerable if growth turns out worse than projected. The OBR itself only gives a 59 percent chance of hitting her fiscal rules, raising the prospect that she will have to raise taxes again. Besides:

Even under the OBR’s rosy assumptions, the UK will still have at the end of this parliament one of the highest debt to GDP ratios of any advanced economy, a higher budget deficit at 2.5% of GDP than most advanced economies have today, and will be paying a higher percentage of government revenues on debt interest than any country other than America.

What Reeves has done is buy herself some time, with her party and the bond markets. But I doubt she has done enough to remove the bond market’s doubts about Britain’s willingness to control its debts, not least because borrowing will actually rise for the next four years. I fear her decision not to raise income tax was a missed opportunity. It wouldn’t take much to wipe out that headroom – an AI crash, for example – sending her back to square one. Of course, if Labour does have to raise taxes again, it will surely be under a different chancellor.

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2. Ukraine Bystanders

Who knows whether Donald Trump will manage to broker a peace deal between Russia and Ukraine. The latest noises coming publicly from both sides sound cautiously optimistic - but that may simply be because neither side wasn’t to be blamed by the US president for blocking an end to the war. It’s hard to believe that Vladimir Putin has really given up his goal of controlling all of Ukraine, or that the Ukrainians will surrender to Russia on the basis of the grotesque Kremlin-inspired 28-point plan that the Washington was touting last week.

What is clear is that Europeans urgently need their own plan to support Ukraine if they are to play any leverage in the outcome of a conflict in which they insist the continent’s security is at stake. If Europe wants real influence, it needs to find a way to keep funding Ukraine before it runs out of money early next year. That means it must finally deliver on its promise to use the frozen assets to finance a €140 billion loan for Kyiv that it will not have to repay until Russia has paid war reparations. As I noted in My latest column for Euractiv:

It is now three months since German chancellor Friedrich Merz endorsed the idea, two months since Ursula von der Leyen adopted it as Commission policy in her State of the European Union speech, and one month since national leaders were presented with the Commission proposal at the European Council. Still there is no agreement.

This is now becoming a serious test of Europe’s geopolitical pretensions and global credibility. Even now, the Commission has still not released any detailed legal texts setting out how the reparation loan will work in practice. That’s because the plan has run into serious political opposition. As I noted in Euractiv, Belgium has borne most of the blame – not all of it deserved:

Belgian resistance stems partly from fear of Russian retaliation. Indeed, Brussels has asked for compensation for any losses suffered by Belgian firms still active in Russia, according to someone familiar with the talks. But such an indemnity is unwarranted and would set a destructive precedent – the Commission is right to refuse. Belgium is on firmer ground in insisting that frozen assets held elsewhere in Europe should also contribute to the reparation loan, ensuring the political and legal risks are more evenly shared.

Belgium’s demand for legal and financial guarantees from other member states is even more reasonable. The risk that Euroclear – the Brussels-based clearing house – could be forced to return frozen assets to Russia before reparations are paid is not trivial. Under the Commission plan, Euroclear would extend a €190 billion loan to a European entity, which would then transfer €140 billion to Ukraine after repaying previous EU loans that relied on the interest on frozen assets.

The challenge is to find a way to ensure that Russia’s funds will remain frozen for as long as necessary, so that Euroclear isn’t suddenly presented with a demand to repay €190 billion. Brussels claims to have devised a mechanism to avoid the six-monthly sanctions renewals that would leave the scheme at the mercy of a Hungarian or Slovak veto. But this workaround has never been legally tested. Meanwhile, Trump’s peace plan would require the EU to unfreeze the assets and transfer $100 billion of them to a US-managed fund that would skim off half the profits, thereby depriving Kyiv of unrestricted access to them.

In a column for Reuters, Hugo Dixon, one of the architects of the original reparations-loan concept (see his guest post for Wealth of Nations), proposed an alternative structure whereby the funds would be transferred out of Euroclear to a Special Purpose Vehicle. This would eliminate the risk of the funds becoming unfrozen since, if sanctions were lifted, Russia would receive only an IOU from Ukraine that would be worthless until any reparations are paid. Belgian prime minister Bart de Wever has indicated he might welcome such a solution:

If there is somebody who wants to take the entire Euroclear balance…. and will sign for all the risks, he can have it… I want to get rid of it.

Nonetheless, the challenge is to find a legally watertight method of transferring assets under EU law that does not require unanimity, given the certainty of a Slovakian and Hungarian veto. More broadly, several member states fear the move would resemble expropriation – exposing the EU to reputational and legal blowback. Indeed, Euroclear will only have added to those fears with an explicit warning in a letter leaked to the Financial Times:

European governments would face higher debt costs if the EU presses ahead with plans to use Russian frozen assets to support €140bn of loans to Ukraine, the main custodian of the assets has warned. In a letter seen by the Financial Times, the Brussels-based central securities depository Euroclear argued that the latest loan plan for Ukraine would be perceived as “confiscation” outside the EU and spook investors in European sovereign debt.

Of course, this may be special pleading by a commercial entity with a large amount of skin in the game. The truth is that there is a precedent for confiscating state assets to pay for reparations. In the aftermath of the first Gulf War in 1992, the United Nations passed Resolution 778 requiring members to pass frozen Iraqi assets to a UN-managed fund to pay for reparations to Kuwait. European countries complied with that resolution. Meanwhile in March 2025, the European Parliament approved a draft resolution enabling the use of frozen assets belonging to the ousted Assad regime to support Syria’s reconstruction.

Either way, Europeans are running out of time and out of options. As Commission president Ursula von der Leyen acknowledged in a a leaked letter to EU leaders last week, there are no perfect, risk-free options. Nor are there credible Plan Bs to finance Ukraine if the reparation loan scheme doesn’t fly. Most European governments, not least Britain, face their own fiscal constraints, and joint borrowing through the EU budget would require unanimity – a non-starter given Hungarian and Slovak opposition.

Europeans need to find a way to address Belgium’s legitimate concerns. And Belgium needs to put the security of the continent before its narrow self-interest.

Back in April, when Europeans were grappling with one of Trump’s previous attempts to force Ukraine into a humiliating surrender, I argued that delivering on the reparation loan was Europe’s Moment of Truth. Eight months later, there is a very real risk that this moment will soon have been and gone.

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3. Peak Trump

A few weeks ago, I asked in a post whether we might, just possibly, have past Peak Trump. That was in the immediate aftermath of the heavy Republican defeat in elections at the start of November, which among other eye-catching results, saw Zohran Mamdami, the self-proclaimed democratic socialist become Mayor of New York. Since then, there has been plenty of further signs that Trump may be prematurely entering the lame duck phase of his presidency, as I noted in my latest column for Kathimerini, the leading Greek newspaper:

The irony is that what turned voters against Trump was the very thing that had helped propel him back to the White House: the high cost of living. Voters blame the president for the rising cost of groceries, even as Trump claims they are falling. Some 76 percent of voters view the economy negatively, according to a poll for Fox News last week. That’s worse than the 70 percent who said the same at the end of former President Biden’s term. The same poll found that 58 percent of voters now disapprove of how Trump is doing his job, compared to 41 percent who approve. Only once has he scored lower, in October 2017 in his first term.

Meanwhile there are growing signs of split within the Republican party, and even the MAGA movement. Trump was unable to prevent Republicans in Congress from voting to release the Epstein files, leading to his spectacular falling out with Marjorie Taylor Greene, one of his previously most loyal supporters who has since announced her resignation from Congress. Other MAGA supporters accuse him of spending too much time on foreign affairs, regard his interventions in Iran, Gaza and Venezuela as contrary to America First principles. At the same time, traditional conservatives are outraged by the willingness of MAGA influencers such as talk-show host Tucker Carlson to embrace antisemitic provocateurs such as Nick Fuentes.

There are other signs that Trump’s extraordinary grip on all the institutional levers of power may be slipping. The Senate earlier this month voted to repeal punitive tariffs on Brazil and Canada, a sign that Trump’s enthusiasm for tariffs is not shared by all Republicans. Republicans in Indiana defied Trump’s demand to gerrymander constituency boundaries. The Republican-heavy Supreme Court has cast doubt on the legality of Trump’s use of emergency powers to impose tariffs, raising the prospect that his signature policy could be ruled unconstitutional. Most encouragingly, Trump has encountered serious blowback from senior Republicans for his attempts to sell-out Ukraine.

Then there are the reports suggesting that father time may be catching up with the 79 year-old president, as it did with his predecessor. Trump was outraged by this story in the New York Times last week suggesting that he is working shorter days and falling asleep in his office:

Mr. Trump has fewer public events on his schedule and is traveling domestically much less than he did by this point during his first year in office, in 2017, although he is taking more foreign trips. He also keeps a shorter public schedule than he used to. Most of his public appearances fall between noon and 5 p.m., on average.

Trump could be in even greater trouble if the AI bubble in the stock market were to burst or deeper problems were to emerge in the vast and opaque private credit market or if the collapse the crypto markets were to spill over into the wider markets. As previously noted (see The Gen Z Put), given the scale of American savings invested in the stock market, a dotcom-style crash could wipe two percentage points off GDP, the International Monetary Fund has warned.

As I noted in Kathimerini:

The good news for Europe and the rest of the world is that a weakened Trump may be more cautious about doing anything that might undermine the US and global economy ahead of next year’s midterm elections… He has already backed down over his trade war with China and last week agreed an outline trade deal with Switzerland… One sign that Trump recognises his vulnerability is that he last week canceled tariffs on 200 agricultural items, an implicit admission that tariffs do push up inflation and are paid by Americans.

On the other hand, even a lame duck Trump can still inflict considerable damage over the next three years. There seems little chance that he will abandon his transactional approach to foreign policy, bullying friend and foe to accept one-sided deals…. Even if we have passed peak Trump, we are unlikely to have passed peak danger.