Only last week, when I wrote about the pre-Budget pantomime, it looked as though we had already seen every twist. Yet the Office for Budget Responsibility (OBR) still managed a final stumble, accidentally leaking its own forecasts shortly before the Chancellor was due to speak – an episode that said rather too much about the state of official policymaking.
The Budget that followed did little to restore confidence. After a year of rhetoric about ‘national renewal’, the Chancellor has produced a programme that avoids the most difficult choices. Instead, it increases spending, raises taxes by another £26.6 billion by 2030-31, weakens incentives to work and entrenches a model that is becoming increasingly tax-rich but growth-poor. This is not a Budget built on renewed economic strength, but one leaning heavily on an economy swollen by inflation rather than improved productivity.
Nowhere is this clearer than in the extension of the income tax threshold freeze. The OBR sets out the impact starkly. Compared with its March forecast, the decision pulls 780,000 more people into basic rate tax, 920,000 into the higher rate and 4,000 into the additional rate by 2029-30. By 2030-31, nearly one in four taxpayers will fall into the top two bands, up from 15% a decade ago. It is one of the largest stealth tax rises in modern British history, the single biggest tax rise in the Budget, and a major reason why the tax burden is heading for a record 38.3% of GDP.
Effect of threshold freezes on additional taxpayers and tax receipts
This rests on a tax structure that no longer reflects the economy it is meant to govern. The 40% rate still starts at £50,270, a threshold set when that income signalled affluence. Today, it barely covers housing, childcare and commuting. What once counted as middle-class comfort is now a standard mid-career salary, yet the Treasury taxes these workers as if they were the affluent minority. Fiscal drag has become a central pillar of the state’s revenue strategy.
The OBR offers a clue as to why. Corporate profit growth has been revised down by around 6 percentage points, while labour income is revised up by 0.9 points. The most accessible and reliable source of revenue – wages – is holding up, while the parts of the economy that drive long-term prosperity, including profits and investment returns, are shrinking. The Government is leaning more heavily on income tax because the productive side of the economy is faltering.
Rachel Reeves’s response is to squeeze wage-earners further while discouraging investment. ISA allowances fall, dividend and savings taxes rise, writing-down allowances are cut from 18% to 14%, and salary-sacrifice pension contributions above £2,000 will be subject to National Insurance from 2029. Even electric vehicles, once championed by ministers, attract a new 3p-per-mile tax.
All this lands when investment is weak and productivity – the only reliable driver of rising living standards – remains poor. The OBR admits a meaningful productivity rebound simply ‘has not materialised’, and growth has been revised down to an average of 1.5% through the decade.
Yet, rather than confront this, the Chancellor expands the least productive part of the economy – the state. Welfare spending alone is projected to be £16bn higher by 2030, with every pound funded by pushing more ordinary workers into higher-rate tax.
If productivity is weak, incentives for work, saving and investment should be strengthened. If profits are slipping, firms need stability and relief, not thinner allowances and sudden tax changes. And if Britain is becoming dangerously dependent on labour income, easing the tax burden on work should be the priority, not freezing thresholds for another six years.
Little wonder Britain now pays higher borrowing costs than any other G7 nation – a quiet but telling vote of no confidence in our medium-term growth prospects. Nothing in this Budget suggests the Government grasps the seriousness of the problem. One hopes the Monetary Policy Committee does, with rate cuts in December and February.
Equally damaging is the sequencing. The spending rises take effect immediately, but the tax rises intended to fund them are delayed. This creates a tidy political story now, while the real fiscal squeeze arrives later, when scrutiny is weaker and the consequences harder to undo – a familiar Westminster tactic. A high-tax, low-growth economy may keep borrowing figures stable for a time, but it cannot lift living standards or widen opportunity. It offers the illusion of discipline while embedding long-term stagnation.
Reeves presents this Budget as the foundation of Britain’s renewal. In reality, it sketches a narrow path in which revenues rise as inflation pushes up wages, growth stalls because investment slows, and the state expands because inefficiency goes unchallenged.
A better path demands the mirror-image of this Budget. Lower marginal rates, broader thresholds and serious incentives for capital formation must be paired with a Government willing to rethink the shape and size of the state itself. Prosperity depends on expanding productive capacity, not repeatedly tightening the vice on the same overstretched taxpayers.
Until that shift occurs, Britain will remain exactly where this Budget leaves it – taxing more, producing less and relying ever more heavily on the parts of the economy that can be squeezed today, while neglecting those that might deliver prosperity tomorrow. How worrying, then, that Reeves has pointedly refused to rule out more tax rises. What she once insisted were once-in-a-parliament measures already look suspiciously like the opening instalment of a yearly tax-and-spend cycle.
