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For weeks, Rachel Reeves’s budget has been built up as a defining moment in British politics, and even British history, a dramatic break with the past that sets the country on a radical new path. And at first glance that, of course, is what it was.
The first budget by a Labour chancellor in 14 years contained almost £70 billion of new spending, equivalent to two per cent of GDP, to be funded in part by the biggest tax rise since 1993, taking the tax burden as a percentage of GDP above 38 percent, the highest level in post-war history.
So is this a dramatic return to Labour tax and spend? Well once you strip away the spin, what is striking about Reeve’s budget is not its radicalism but its conservatism. This was a pretty orthodox budget by an orthodox chancellor.
Reeves’ budget only looks radical if one starts from the premise that the Conservative plans that preceded them were in any way a remotely serious plan for national economic management – as opposed to a cynical scorched earth tactic by a desperate government that knew it was going to lose.
The bulk of the £40 billion in tax rises that Reeves announced simply reverses the two Conservative pre-election national insurance cuts that no responsible government should ever have made – and the proceeds will be used to fill gaping holes in their implausible spending plans that the Office for Budget Responsibility itself had described as a “work of fiction”.
Sure, one can argue about whether these tax rises break a manifesto commitment not to raise taxes on working people. In my view, patently they do not. It would certainly have been better economically if the higher national insurance rate had fallen on employees rather than on employers, given the risk that higher business taxes will discourage investment and lead to lower growth. But while the OBR and Institute for Fiscal Studies reckon that the bulk of the increased tax will be passed onto employees anyway in the form of lower wages, that is speculation: businesses could equally raise prices or simply absorb the costs themselves.
In any case, on this logic, one could argue that any tax is ultimately a tax on working people. So too is a failure to fix a failing health service at a time when there are eight million people on NHS waiting lists and the government is spending nearly £50 billion a year on sickness benefits.
Meanwhile the rest of the £15 billion of tax rises, which include scrapping the non-dom status, reforming private equity carried interest, a modest rise in the rate of capital gains tax and closing some inheritance tax loopholes, had not been excluded in the manifesto and so were no surprise. Indeed, there will have been relief in the City that taxes on capital were not higher.
Where Reeves did gamble was in tweaking the fiscal rules to create more headroom for increased borrowing to fund higher public investment. That is most obviously a financial risk in that, coming just two years after the Liz Truss debacle, any decision to raise borrowing in an economy in which debt is already close to 100 per cent of GDP risks a bond market reaction.
Under her plans, the government will be borrowing an extra £23 billion and running a deficit of 4.5 percent of GDP next year, and it will still be borrowing £70 billion in 2030, a deficit of 2.5 percent of GDP.
Nonetheless, Reeves’s decision to adopt a new measure of government debt that includes financial assets such as funded pension funds, student loans and government equity holdings, including in the new National Wealth Fund, is eminently sensible.
Not only does it provide a much more accurate reflection of the national balance sheet than the narrower measure of public sector net debt used under the old rules, but it provides a much greater incentive for the Government to manage those assets well. Indeed, I would have preferred Reeves to have adopted public sector net worth, a much more comprehensive measure of government assets and liabilities that includes physical assets such as schools, roads and hospitals, given that these are the assets that Reeves rightly believes Britain has underinvested in.
Reeves’ decision to borrow to invest in new roads, rail and green technology is also a political gamble, not least because, awkwardly for her, the OBR forecasts that she will see little benefit economically during the life of this parliament.
After a short-term sugar rush over the next two years when the bulk of the capital spending is forecast to take place, growth is forecast to fall back more or less to where it would have been until 2030 at around 1.6 per cent a year.
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Reeves Must be Bolder
The OBR reckons that all this new investment could in the long-term lift growth by one percentage point per year, but not until the middle of the next decade.
However, if all that she has to show for £70 billion of increased spending is higher inflation and lower growth, voters are unlikely to be impressed.
In fact if Reeves is going to deliver on the Government’s “mission” to sustainably raise the growth rate during the course of this parliament she will need to be much braver.
What was missing from her tax and spend agenda was any sign of zeal for reform, or willingness to tackle vested interests, or set out a vision of new economic model. Instead, there was a worrying tendency to take the path of least resistance, despite a giant majority and nearly five years until the next election: fuel duty frozen yet again, stamp duty raised, council tax left alone, no promise of reform of an overly complex tax system to remove distortionary cliff edges, no big announcements on public sector productivity, no discussion of private sector investment.
After what we have all been through over the past 14 years, simply reversing the worst of the reckless Conservative damage is not going to be enough.