The first Labour budget in 14 years introduced some much-needed honesty on the requirement for higher taxes and borrowing in an ageing society characterised by sluggish economic growth and a deteriorating public realm. This allowed Rachel Reeves to earmark essential resources for schools and hospitals, and to increase levels of public investment to secure future growth. That this budget had no hope of being a magic bullet for Britain’s economic woes, however, is no reflection of Reeves’s lack of ambition, but a sign of just how bad the problems she inherited are.
The Conservatives’ approach to the economy has made the longstanding issues that have for decades plagued the UK worse. Through cutting back the state while doling out tax cuts to affluent households, then pursuing a hard Brexit, successive Conservative prime ministers have caused huge damage to the economy in pursuit of ideology and worsened the impact of the unenviable economic headwinds of recent years. In his last budget as chancellor, Jeremy Hunt offered up a £23bn cut in national insurance that the UK could not afford, paid for by baking in unachievable spending cuts after the July election: the height of fiscal irresponsibility. Kemi Badenoch, today elected leader of the Conservative party, will no doubt continue to cleave to a wrong-headed predilection for a small state.
This Conservative legacy is not something Reeves could wave a magic wand to make vanish. But her budget signals a decisive break with the past. First, she threw off the deception that public services and the welfare state can bear the further cuts that Hunt had planned for departments other than health, education and defence. This was a significantly tax-increasing budget: Reeves announced around £40bn of tax rises, the bulk of which comes from an increase in employer national insurance contributions. That has its downsides: it risks disproportionately hitting the wages of the lower paid if employers pass it on through lower pay, as economists expect. It will also hit hard charities and small businesses providing social care, health and childcare services; they should have been more protected. But there are other specific tax changes, such as increases to capital gains tax, higher stamp duty for additional homes and reductions in inheritance tax relief, that will affect wealthy households more, and 3 million low-paid workers will benefit from increases in the minimum wage.
Second, Reeves chose to relax her fiscal rule on public debt so that it accounts for the value of the financial assets that result from investment as well as its costs. This allowed her to increase planned levels of public investment over the next five years, which Paul Johnson, director of the Institute for Fiscal Studies, called “a courageous move and a welcome focus on the long term”.
These two moves are very significant. The tax increase is big enough that there is sufficient left over after filling in the “black hole” of Conservative unfunded spending commitments that Reeves can channel extra resources into public services, with the big winners being the NHS, schools and much-needed emergency funding for the justice department. The Office for Budget Responsibility has estimated that Reeves’s boost to public investment will add an extra 1.4% to GDP over the long run.
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But this budget could never be a panacea. The problems across the public realm are so fundamental that even a fairly big cash injection will not go far. The biggest sum is reserved for the NHS; but even that increase is in line with the average annual rise in funding it received from its inception until 2010. After increases in public service spending of 4.3% this year and 2.6% next, Reeves has only allowed for it to go up by 1.3% a year for the last three years of the parliament, implying a further cut of £8bn a year for unprotected departments by the next election. The risk is that the extra spending slows the decline of the public realm but is not enough to improve it in line with people’s expectations. While the tax burden is higher than it has been historically, a rising tax burden over the long term is the inevitable consequence of an ageing society with fewer working-age taxpayers to meet the costs of rising health and care costs: a fiscal reckoning that no politician has yet truly confronted. And there were important omissions on spending, notably on alleviating rising levels of child poverty through reversing some of the pernicious benefit and tax credit cuts of the last government.
The OBR growth forecasts also make for difficult reading for the government; it predicts the extra growth that results from public investment will just be 0.14% of GDP by 2029, with the real benefits not secured until after the next election. But, as Will Hutton argues, that may be too pessimistic a prediction; and Labour has also promised to boost growth through other measures, such as planning reform and industrial strategy. Reeves will be very much hoping to beat the OBR forecast, because slow average growth translates into a worryingly anaemic prognosis for living standards.
That this budget is laced with risk is not reflective of Reeves’s ability as chancellor but of the terrible Conservative legacy she inherited. Ignore the howls of anguish from wealthy losers on inheritance and capital gains tax. This is a brave and bold budget that shows Labour understands the true scale of the economic challenge facing Britain in the 2020s.