Agricultural relief, national insurance, VAT on private schools. It’s clear that tax rises, and the particularly pernicious nature of many of these tax rises, have caused the biggest rows of Labour’s first Budget back in power. That’s completely understandable. I don’t need to persuade CapX readers about why tax rises should always be one of the main talking points of a Budget, particularly given we are now heading for a record high tax burden. And with this one being the biggest tax-raising Budget in our history, it’s no surprise that has been the focus.
But one of the unfortunate side effects has been that, once again, everyone seems to have forgotten about the state of the public finances. That’s partly the fault of Rachel Reeves, who has not only introduced a Budget that will cripple (in no particular order) farmers, pensioners, students, families, businesses, pubs, holidaymakers, drinkers, smokers, vapers – and every other member of the British public who pays tax in some form; she has also politicised the public finances in a way that greatly risks the future health of the economy.
That’s not to say that the Conservatives don’t deserve their fair share of the blame for the state of the public finances. The national debt is around 100% of GDP, while debt interest was over £100 billion in 2023-24. That’s not what Reeves and the Labour Party have focused on, though. Instead, they’ve endless parroted claims of a £22bn black hole, which it has since turned out is largely self-inflicted. In an inverse of Monty Python’s Black Knight, something that looks very much like a scratch is being portrayed as a brutal dismemberment inflicted by the irresponsible Tories.
The real problem with the public finances is not a short-term shortfall generated by in-year spending decisions. The real problem is that the state consistently spends way beyond its means without the growth or the tax revenues necessary to fund it. Far from fixing these foundations, Reeves has thrown petrol, a bottle of vodka and a stack of A4 paper onto an already pretty furious fire.
As a result of this high-tax, high-spend, high-borrowing Budget, 10-year Gilt yields have steadily climbed to around 4.5%. That’s higher than at any point during Truss’ premiership. In many ways, Reeves is the luckiest woman alive. If it wasn’t for Truss, the LDI (liability-driven investment) crisis that ultimately destroyed her might well have remained unaddressed and then have blown up in Reeves’ face instead.
But even without a Truss-style collapse, the long-term impact of the Budget, according to the OBR’s own assessment, will add £67bn in debt interest payments over a five-year period. That’s not £67bn in total. That’s £67bn on top of what was already forecast by the OBR earlier this year. So the £89bn forecast to be spent in 2024-25 will now be £104.9bn, the £88.9bn in 2025-26 will be £105.7bn and so on. The additional debt interest will average out to £13.4bn a year. That’s enough for a 2p cut to the basic rate of income tax. It will also accelerate the speed of the national debt from an increase of £4,410 per second to £6,082 per second, as you can track on the TPA’s debt clock.
Regrettably, we’re cursed with a government that doesn’t care, unlike in the United States where Elon Musk is regularly raising this issue with his hundreds of millions of followers. Just this week, Musk tweeted out: ‘if we don’t tackle the national debt, all tax revenue will go to paying interest and there will be nothing left for anything else’. Hyperbole that may be, but at least he’s not brushing this issue under the carpet.
Sometimes it can feel like we’ve been talking about this issue for time immemorial. Some even question whether the debt ever needs to be repaid. In reality, this is a novel problem. While the UK has gone through periods of serious indebtedness, these have invariably been during major wars, right from the War of the Spanish Succession through to the two world wars. Never have we seen such a sustained and significant rise in the national debt during peacetime. As a result, in today’s prices the interest on the debt has increased from £22.3bn in 1955-56 to £102.2bn in 2023-24, a whopping 358% increase.
Given the damage that will be done by the £40bn worth of tax rises, it’s absolutely right that they are the focus for the moment. But until we start talking seriously about how to tackle the national debt, Britain’s financial future looks to be in some danger.
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