Rarely has an upcoming budget provoked so much speculation (plus advice tendered) as that presented by Rachel Reeves last week. Did it deliver? Or disappoint?
The budget good
To begin with the positive: Jeremy Hunt’s spring budget included cuts to both capital and current spending, which have been reversed. Now public investment will be maintained at 2.5% of gross domestic product (GDP) (whereas under Hunt it was reduced to 1.7%). Taken together, capital and current spending will increase by £70bn, broadly in line with the redefined fiscal rules. As economist Simon Wren-Lewis has written, there will be: “no additional austerity compared with where we are now, but no attempt to return spending to the levels to restore public services to where they were in 2010”
A big slice of that increased spending will go to the NHS, but Reeves is to be commended for also targeting the justice system and local government, which have taken huge financial hits since 2010. The latter two areas are not popular with the electorate, so the government has done well to identify the areas with the greatest need, and make decisions based on urgency rather than appearance.
Reeves has done well to move from the traditional definition of national debt to a broader definition (public sector net liabilities) that includes government assets, thus allowing the chancellor to borrow more and stay within the rules.
The minimum wage is to be increased, as are pensions (plus 4.1%), and carers’ allowances. All of this is welcome, as is the additional £500mn to subsidise affordable housing (although two billion would have been more to the point – so this is only a marginal improvement). There have been some efforts to stave off the avoidance of inheritance tax by those who choose to invest in farmland, not because they want to be farmers, but because they want to protect their assets.
Various taxes have risen, moving the UK government’s ‘tax take’ as a proportion of GDP closer to the European average. For decades now, the UK public have been under-taxed, resulting in poor public services and shabby public buildings and infrastructure. The government is moving towards striking a better balance between ‘public’ and ‘private’, and hopefully the public will appreciate this.
The budget bad
The key bad was established months before the budget when Keir Starmer and Rachel Reeves pledged not to increase income tax, VAT, or national insurance. At a stroke, they deprived themselves of the opportunity to generate more yield via the three taxes that provide the government’s main sources of revenue. So, the chancellor was forced to resort to a series of second-best solutions and search for spare change down the back of the sofa.
Her solution was to increase employers’ national insurance contributions (NICs). This change is expected to bring in £26bn of the £40bn increase in tax revenues. While still progressive (which is good), the increase in employers’ NICs has the potentially undesirable side effect of reducing employment, especially when combined with the increase in the minimum wage. So, a mixture of ‘bad’ and ‘good’ here.
Among the obvious ‘bads’ is the freezing of income tax thresholds, which draws more low-income earners into the income tax net. To that we can add the failure to increase fuel duty, which was a decision made out of pure political cowardice, given that budget day came just one day after the floods in Spain claimed the lives of more than two hundred people (climate change!). Here was an opportunity to both raise more tax income and do something for the environment. And she ducked it.
The budget came across as an immediate firefighting measure (which admittedly was necessary) but without a longer-term plan for the future. Various institutions – university departments think tanks – have proposed new taxes, and my own favourite is the introduction of a land-value tax. The latter is ‘efficient’ from a fiscal point of view, as it has minimal side effects.
The changes to capital gains tax and inheritance tax are negligible, so you can choose to assess these as ‘marginal goods’ or ‘marginal bads’, as they are largely missed opportunities.
A significant ‘bad’ is the failure to completely junk the fiscal rule that debt should fall as a percentage of GDP with a three-year rolling target in mind. Wren-Lewis believes this is a political manoeuvre to placate those who buy into wrong-headed economics.
The budget ugly
There is a very good podcast on the Institute of Fiscal Studies (IFS) website in which three experts (including Paul Johnson, the doyen of budget commentators) scrutinise Reeves’ offer. Their comments include: “the fiscal situation is really pretty dire” … and Jeremy Hunt gave Reeves “a hospital pass”. In short, the IFS acknowledged that the chancellor was facing some very tough choices and, although this was not said, the indications from their discussion was that Reeves had done at least a moderately good job.
The markets did not share this view, and reacted immediately (until Thursday) with a falling sterling exchange rate and rising interest rates. These moves were nowhere near as violent as the markets’ reaction to the Liz Truss/Kwasi Kwarteng fiscal event, and have since recovered somewhat, but for the City and the right-wing media, this budget was not sufficiently Hunt-like.
Six months ago, Labour was on average 18 points ahead of an abjectly poor Conservative government in opinion polls. Various Labour missteps since they took office have seen that lead whittled down to just one point, and so far, the budget has done little to restore Labour’s poll performance.
All I can say is that a lot of people have short memories, are easily swayed by the right-wing media, and prioritise their own material interests over the common wealth. These people are my ‘ugly’. How can memories be so short? How can people be so self-centred?
Conclusion
Wren-Lewis heads his most recent post: “A budget that points the way but doesn’t get us very far” – a comment I feel is spot-on. Peter Wrigley, ‘the Sage of Birstall’, concludes his budget blog piece with “What Britain needs is something transformational, and it’s not in this budget”.
Both Wren-Lewis and Wrigley are right, but given the entrenched conservatism (see ‘ugly’ section, above), Reeves, Starmer and the rest of us may be doomed to move forward only in second gear.
Alternatively, we can continue to challenge.
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