Above all, this was a Budget for a bigger state. Public spending will be even higher, financed by large increases both in taxation and in government borrowing. In addition, the Budget continues the steady ratcheting up of state intervention and regulation, including another large increase in minimum wages. This is very hard to square with the commitment to prioritise growth.
The centrepiece was the commitment to financial stability. In principle, the new fiscal rules are an improvement on what went before. It makes sense to balance the current budget, so that day-to-day spending is covered by tax revenues, and to tweak the targeted measure of debt to allow more borrowing for productive investment.
Nonetheless, balancing the current budget while still increasing day-to-day spending – including yet another huge injection of cash into the NHS – has required a larger and broader range of tax increases. The overall package of nearly £42 billion in annual tax increases by 2029-30 is at the high end of expectations, including £25 billion from an increase in employer’s national insurance contributions (NI).
Here, Rachel Reeves still seems to be the only economist in the country who is willing to argue that the increases in employer’s NI will not add to the burden on ‘working people’, and her own past comments suggest that even she accepts that it will. Indeed, this was confirmed in the new OBR forecasts today.
To be fair, all the available options on tax involve difficult decisions about the trade-offs. The Budget did include some increases in taxes on income from savings and investment, notably CGT, and the direct burden of these will fall mainly on the better off. But these taxes are also the most damaging for longer-term growth. And the more money the Chancellor had tried to raise from a relatively small number of people, especially those with more life choices, the greater the risk that they change their behaviour in ways that actually reduce the overall tax take.
Inevitably, then, most of the additional burden has fallen on broader-based taxes on income from employment, which are most likely to stick. Raising more of the money from increasing the rates of employer’s NI is also more progressive than extending the freeze on income tax allowances, though lowering the threshold at which employers have to pay NI has had the opposite effect.
Turning to investment, the new measure of debt used in the fiscal rules should allow another £100 billion or so of capital spending in total over five years. However, new borrowing is still new borrowing, whatever the purpose, and will still add to the mountain of debt that has to be serviced.
The financial markets have yet to make their minds up on this. The cost of government borrowing was little changed in the wake of the Budget today, partly because the new fiscal rules were widely trailed. If anything, bond investors might be comforted by the news that the Chancellor aims both to hit both her main fiscal targets (balancing the current budget and debt falling as a share of national income) within three years, rather than the usual five.
But a sharp rise in borrowing costs is still one of several ways in which this Budget could backfire. Markets will need to be reassured that the additional borrowing for investment will indeed boost growth and hence generate the additional revenues needed to finance the additional debt. So far, the plans are sketchy, and the government has yet to make a compelling case for more state investment in areas which could and should normally be left to the private sector.
Even if investors initially take the Budget in their stride, there is a risk that the increase in the size of the state crowds out the private sector, whether through more spending, taxation, borrowing or regulation. In particular, the increases in CGT and other capital taxes will raise the cost of capital for private investors, and the increases in employer’s NI will raise the cost of hiring for private businesses. The decision to shield public sector employers from the increase in NI simply tips the balance further in favour of the state.
Finally, there is the broader impact on sentiment. The new government will need to persuade people quickly that the large tax increases in this Budget are a one-off to fix a mess left by the previous lot, and that they will see benefits soon in the form of better public services.
This will be difficult to pull off. The Budget has surely breached the spirit of Labour’s manifesto commitments on tax, if not the letter. The political fallout might be limited by the fact that these commitments were barely credible in the first place. But politics aside, this breach could undermine confidence in any new promises. And in any event, if public sector productivity fails to improve soon and further injections of cash are needed, the new fiscal rules will require another dose of tax increases too.
Overall, I think Rachel Reeves made the best of a bad hand, especially in her choice of new fiscal rules and which taxes to increase to hit them. But she had still picked many of the cards herself, starting on the spending side.
Plain-speaking Economics 
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