Big, bold and risky, but Rachel Reeves has still presented a continuity budget
In the long line of UK government budgets, this first one from Labour in 14 years will be remembered as one of the more significant. Perhaps not like those of Geoffrey Howe in 1981, which controversially cut spending in the middle of a recession, or Hugh Dalton in 1946, which heralded the massive expansion of the welfare state.
But it was certainly on a par with Gordon Brown’s in 1997 when he signalled a change in direction after 18 years in opposition. Or more ominously, the crisis management budget of Norman Lamont in 1993, delivered in the aftermath of sterling crashing out of the ERM and a collapse of government economic policy.
Reeves’ 2024 budget, by comparison, is the first delivered by a female chancellor, and the first to outline the promised change demanded by the electorate back in July.
This was a big budget but also a difficult one – which is why Reeves and Prime Minister Keir Starmer have been softening up the country for unpopular choices since they won office. A range of potential, but painful, decisions have been publicly floated since then, with government testing the water for mainstream inheritance tax increases, a wealth tax and big pension raids.
The chancellor did none of those in this budget beyond some modest adjustments which are nonetheless proving controversial. This is mainly because they were judged counterproductive, impractical or simply did not raise the funds required.
She also chose to leave alone the headline rates of income tax and national insurance paid by individuals. Of course, this decision owed more to commitments made ahead of the general election not to raise taxes on “working people” – leading to some comical rhetorical contortions in the weeks before the budget.
This all meant that she was left with a challenging path of least resistance, including an increase in capital gains tax and employer national insurance contributions (NICs).
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Nevertheless, these measures represent the biggest tax-rising budget since Lamont’s in 1993 (forced upon the then-government because of the crisis in fiscal and monetary policy).
Despite tax already being at historic levels as a proportion of GDP, Reeves took an additional £40 billion in revenue. The NHS and other key public services are the winners but departments will have to make austerity-style savings, squeezing the likes of local authorities. The government has denied this will amount to austerity in reality however, given the increase in public spending.
The bold bit
Perhaps the boldest move is the plan to revise the Treasury’s fiscal rules. This risked spooking the markets, explaining why it was leaked well ahead of the official announcement.
What it does mean, however, is that the chancellor has much greater scope for capital spending over the parliament and announced £100 billion of public investment over five years including in transport, housing and research and development.
It also means that this government plans to avoid one recognisable mistake made by the Conservative-Liberal Democrat coalition government and its austerity squeeze after 2010. There, the easier choice of cancelling investment projects over current spending undermined efforts to generate prosperity throughout the economy.
Given that the key objective of this chancellor is to strengthen economic growth, it is hoped that any short-term wobbles should be calmed by the longer-term benefits. That is a big hope though given that employers will have to pay an extra £25 billion to balance this budget, which risks dampening growth elsewhere. Further OBR analysis forecasts the consequence will be lower pay and some inflation.
You wouldn’t know it from the rhetoric of the chancellor, leader of the opposition Rishi Sunak (making his final official appearance responding to the budget), or indeed critics in the right-wing press, but this budget is also the “continuity budget”.
It continues the broad approach put in place by previous chancellor Jeremy Hunt when he reversed the disastrous so-called mini-budget of his own short-lived predecessor Kwasi Kwarteng, which left markets in freefall and made Liz Truss the shortest-serving British prime minister in history.
A continuity budget?.
Treasury/Flickr, CC BY-NC-ND
Reeves’ budget very much continued the economic approach established by Hunt in stabilising markets and public finances. Had there been a Labour government in the aftermath of Truss two years ago, the decisions would have looked little different. They too would have had to reverse the measures and live within the same constraints – those of living in the real world.
The Truss administration pursued a fantasy economic policy that would not have been possible in any circumstances, but was particularly reckless in the wake of Brexit and COVID. It was Hunt who reversed this, putting the UK on the path where it finds itself today.
But there is at least one difference. Reeves has the advantage of giving her first budget speech at the beginning of the parliament and with a commanding majority, rather than delivering unpopular home truths at the tail end. Here she was able to set out at least a roadmap for the future where there is a promise of things getting better.
She hopes to get the pain out of the way early and there is no indication that this is the beginning of some sort of pattern of year-on-year tax rises. Indeed, Reeves has distanced herself from the idea. The chancellor hopes to have ended uncertainty, doing what Hunt would have liked to have done, where difficult decisions taken today pay dividends in the future. Läs mer…