Rachel Reeves took to her feet at the Despatch Box today to deliver a package of measures she promised a year ago could be avoided. Last autumn, the Chancellor told the country she would not be “coming back with more borrowing or more taxes”, and that the Labour Government’s painful first Budget would effectively be a ‘one and done’ event.
Fast forward a little over twelve months, and the Chancellor’s words appear overly optimistic as she has been forced to deliver a second painful tax-raising Budget – to the tune of a £26 billion tax increase - against a chaotic backdrop of an unprecedented leak of the OBR’s Economic and fiscal outlook report.
This was a big Budget, and a complex one too. Economic growth has remained slow over the last 12 months, with the OBR confirming today that weaker UK productivity levels have impacted growth.
Meanwhile, the Government failed to implement the welfare spending cuts it had planned this summer at a significant cost of around £9 billion, while rising borrowing costs have continued to constrain the Chancellor’s room for manoeuvre within her fiscal rules.
The Chancellor has therefore continued to walk her tightrope – navigating a trilemma of i) her fiscal rules; ii) the manifesto commitment not to raise the three main taxes, and iii) an inability to meaningfully cut public spending through welfare cuts. As a result, the Chancellor has been forced to ‘shop around’ for a list of individual targeted tax rises to plug the fiscal gap and deliver a workable Budget package to the country.
The Treasury has labelled this Budget one of the most ‘progressive’ in years, a fair argument to make if you consider the overall picture of a new ‘High Value [property] Tax’ and higher taxes on savings and dividends being used to fund the NHS and to tackle child poverty. However, reading the OBR’s report, the conclusion cannot be avoided that the Government did not want to have to raise taxes to the level reached today and has been forced into doing so by its own backbenchers.
Despite the Budget’s consistent focus on the theme of ‘fairness’, there is now a very real risk that these proposed tax rises – deferred though many of them are until the end of the decade – will exacerbate the Government’s trust deficit with the electorate. Though the Chancellor backed away from a previously mooted plan to raise the basic rate of Income Tax, helped in avoiding the most difficult decisions by OBR mechanics, the decision to announce a three-year extension to the freeze on existing Income Tax thresholds still amounts to tax rise for working people in all but name. The OBR now estimates that one in four taxpayers will be paying the higher rate of Income Tax by 2030, which is hard to argue credibly does not impact ‘working people’.
Today’s Budget will see the overall tax burden as a share of GDP rising to 38%. In the opposite of a ‘feel good’ measure, the Chancellor also chose to hit retail savers by dramatically cutting the tax-free cash ISA savings limit from £20,000 to £12,000 and will also hit pension savers currently benefiting from NICs-free salary sacrifice pension schemes with a new £2,000 savings cap (this was the Chancellor’s second biggest tax raising measure announced today amounting to £4.7 billion).
That tax burden will be used, alongside NHS investment, to fund a £16 billion increase in welfare spending by the end of the forecast period, which the Government will now need to muster the political courage to defend, opening a clear line of attack from both the Conservative Party and Reform UK, with around a third of the tax rises announced today going on higher welfare bills.
What this suggests is that ‘growth’ – previously the watchword of this Chancellor and Government –has been relegated in favour of an emphasis on ‘fairness’, with the Budget essentially underlining three fundamental priorities: cutting the cost of living; investing in the NHS; and reducing the cost of servicing debt. This Budget in effect amounts to a very complicated and expensive set of measures to deliver these three things.