Reeves gambles on record taxes and high spending
The Chancellor's Halloween eve Budget has failed to spook the financial markets so far.
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It seems Rachel Reeves’s Halloween eve fiscal treat has failed to spook the financial markets so far, despite the £40 billion worth of tax rises unveiled this afternoon in Labour’s first Budget for 14 years.
The much-anticipated budget, delivered by Britain’s first female chancellor, features big taxes, big spending and big borrowing.
The immediate market reaction has been mixed. The pound is weaker across the board, and GBP/USD is down below $1.2950. Gilt yields sparked sharply for around an hour as traders digested the Budget, but settled down subsequently.
Here’s a recap of some key announcements. First, on taxes.
Labour was elected on a promise that it would not raise income tax, National Insurance, VAT or corporation tax - taxes that account for more than two-thirds of government revenue.
Yet, despite boxing herself in, Reeves has still managed to announce what is, in cash terms, the biggest increase in taxes from a single Budget in history. As a share of the size of the economy, it’s the largest since Norman Lamont’s 1993 Budget.
The main bulk of this will be generated by raising employers' national insurance contributions by 1.2 percentage points to 15 per cent, which is set to raise £25 billion. “I do not take this decision lightly,” said Reeves, who knows this is likely be the most contentious of her tax rises, and one that could damage growth too.
Capital gains and stamp duty taxes are also set to rise, while some inheritance tax loopholes, largely related to farms, will be closed.
Aside from unveiling hefty tax hikes, Reeves made big public spending announcements, and vowed to “invest, invest, invest”.
Overall, the government will invest £100bn in capital spending over the next five years, which the OBR says will increase GDP by 1.4% in the longer term.
On the NHS, she announced a £22.6bn increase in the day-to-day health budget and a £31bn increase in the capital budget. Meanwhile, the government will invest more than £5bn to deliver its housing plan.
The Department for Education is one of the big Budget winners. On schools, Reeves promises a £6.7bn capital investment to the Department for Education next year, which is a 19% real-terms increase on this year. Though it wasn’t a good afternoon for everyone working in the education sector, as Reeves finally confirmed that VAT will be brought in on private school fees in January 2025.
While many will protest that Reeves has broken her promises not to tax “working people”, a separate vow that the Budget would not be a return to austerity has borne reality. There will be a 1.5% increase in real spending on government departments, and 1.7% when including capital spending.
Until recently, spending cuts appeared an inevitability. Yet Labour has managed to avoid them by ripping up the UK government’s existing debt rules, freeing up billions in the process to borrow more for investment. As anticipated, Reeves confirmed this afternoon that debt will now be measured with a new yardstick: “public sector net financial liabilities” as opposed to “public sector net debt”. In the long term, this could be the most significant change in the today’s Budget. And it means borrowing is forecast to rise from £87bn to £127bn this year.
Rishi Sunak accused the Chancellor of dishonesty - and tricking the public by “fiddling with the fiscal rules” to cover up her “enormous borrowing splurge”.
Why hasn’t this alarmed bond markets?
The cost of government borrowing appears to have fallen following the Budget because Reeves announced new rules to not borrow for day-to-day spending, while the OBR is forecasting that the government will spend less than it gathers in tax by 2027.
Public spending is set to increase by almost £70 billion over the next five years, according to the OBR, while the size of the UK state is forecast to settle at 44% of GDP by the end of the decade.
Yet the OBR’s growth forecasts today leave a lot to be desired.
According to its assessment of Labour’s policies for the rest of the decade, real GDP growth will be 1.1% in 2024, 2.0% in 2025, 1.8% in 2026, 1.5% in 2027, 1.5% in 2028, and 1.6% in 2029.
Labour was elected with a promise to deliver growth, and those number are anaemic. Growth falls away.
We can only hope that the gamble of all this extra borrowing for public investment somehow pays off.
Caitlin Allen
Deputy Editor
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