Politics is all about choices. With her first Budget, Rachel Reeves has made clear what side she comes down on: tax the strivers, punish the wealthy and prop up the public sector with the proceeds. More pounds in the public sector’s pockets, while everyone else’s pocket gets pounded.
Economics, however, is all about trade-offs. What happens when you put a target on the back of the rich and plough money into the least productive parts of the economy? We – and Reeves – are about to find out.
This claims to be a Budget to rebuild Britain’s foundations, but its figures are a mirage. A front-loaded splurge on the NHS is paid for by a damaging tax raid and vastly increased state borrowing. Behind this short-term spending spree lurk implausibly low rises to spending on public services after 2025-26: 1.3%, amounting to a real terms cut. In other words, barring some sort of miracle, the Chancellor will be returning for yet more money in just a year or two. Instead of levelling with the British people about our unsustainable levels of spending, Labour have kicked the can down the road.
Even after changing the fiscal rules, Reeves has delivered a Budget that barely squeaks through. Her paper-thin fiscal headroom means that the Office for Budget Responsibility (OBR) thinks it is little better than a coin toss whether Reeves will in fact meet her new, looser rules. No wonder the bond markets, after taking a while to absorb the yawning gap between Labour’s pro-growth rhetoric and the Chancellor’s ‘difficult decisions’, have responded with a thumbs down.
Indeed, far from this Budget marking a line in the sand where Britain’s economy turns decisively European, with permanently higher levels of taxation and a larger state, its evident weaknesses show how unsustainable this social democratic approach really is. Even if we wanted to be like France, we would first need to build housing, infrastructure and an energy supply like France to keep the show on the road.
With taxes up at unprecedented levels and debt interest spending now set to be larger than the defence budget, the only way out of this mess is growth. Of course, Keir Starmer’s pitch to the electorate was that he understood the need to grow the economy to pay for Labour’s public spending ambitions. That now seems as hollow as all the campaign pledges on tax.
There are, it’s true, some welcome commitments to public investment in this Budget. Over the long-term, these could make a difference, although that requires some very long-term thinking: the OBR projects it will take until 2073-4 for 1.4% to be added to GDP by the new investment, with just 0.14% added to GDP by 2029-30. Overall, the OBR’s growth projections across the next five years are anaemic, set to fall back to around 1.5% after an initial boost. The OBR’s figures also do not yet include the hit due to Angela Rayner’s increased red tape for employers, which the Government anticipates will cost business £5bn a year.
Things may get even worse than the OBR thinks. The Growth Commission’s modelling suggests GDP per capita by 2030-31 will be at least 3.4% lower thanks to the measures in this Budget, particularly the rise in employers’ National Insurance.
There is one remaining hope: the Government’s commitment to building infrastructure and extra houses through changing the planning rules is not yet factored into the OBR’s forecasts. Perhaps that will bring enough growth to move the needle.
But don’t hold your breath, at least when it comes to houses. The OBR’s working assumption is that the Government will undershoot its 1.5m housebuilding target by 200,000 homes. Political decisions to spare the blushes of Sadiq Khan and other Labour mayors already seem to have prevented ambitious targets in our cities where more housing is needed the most.
That, in microcosm, is the fatal flaw with this Government’s entire mindset. It thinks state direction is the way to fix Britain’s problems, and cannot see the waste and politicised choices this approach inevitably brings. Worried about getting more bang for your buck? Don’t raise public sector productivity or turn to private enterprise: create a new quango to monitor ‘value for money’. Firms and households buckling under the cost of energy? Set up Great British Energy, put Ed Miliband in charge, and work the details out later. Let there be no ceiling on your ambition to grow the quangocracy. If you want to start a business, pass on the family farm, or, heaven forbid, build a small modular reactor, well, that’s another matter.
The Chancellor has long promised that government investment would lead the way in getting Britain building, crowding in private money behind the best possible bets for the future. The idea that this Government is well placed to make those bets seems preposterous, but as it turns out, that doesn’t matter. The more immediate problem is that this Budget is set to crowd out, not encourage, private investment. And just a third of the £72bn extra Reeves will spend by 2029 is earmarked for public investment.
This Budget was about choices, and about one choice above all others: the choice between free enterprise and the illusion of state control. Again and again, Reeves took from the profitable and gave to the poorly-performing. It is not a recipe for success. As Winston Churchill put it: ‘for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle’.
Britain has great potential, once it stops pursuing self-defeating ways out of its current predicament. Let us hope the next Conservative leader sees that the answer is enterprise and opportunity, not tax and spend.
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