Rachel Reeves’ first Budget was not all bad (see my response on the day here). For a start, the new fiscal rules, while still flawed, are an improvement on what went before. Balancing day-to-day spending with current tax revenue makes good economic sense, as does tweaking the targeted measure of debt to take more account of new assets as well as liabilities.

The increase in employer’s NI was probably the least damaging of the options left to raise more tax without undermining the supply side of the economy. There were still some large increases in taxes on capital, but they were smaller than many had feared.

And while the Budget itself did nothing to boost long-term growth, supporters can still argue that the public finances had to be fixed to provide a stable platform for more positive policies in the future – including reform of public services, pensions and planning rules, and new investment partnerships between the public and private sectors.

In the meantime, the OBR has been reluctant to factor in a big boost from the planned increase in public investment (£100 billion over five years) until there are more details on how the money will be spent. This is the right call, in my view, but others have argued that the OBR is being too conservative. Perhaps there is some good news still to come here.

Unfortunately, that is as positive as I can be. Here are five ways in which the Budget could unravel – and probably will.

First, the adverse reaction in the bond markets has pushed up borrowing costs (both for the government and across the rest of the economy). Investors are worried that the additional public spending will boost inflation and hence slow the pace of rate cuts from the Bank of England, that the additional taxes will not raise as much money as expected, and that the additional borrowing will mean that yields have to rise to attract enough buyers for the additional bonds.

In short, there are fears of a lasting ‘risk premium’ in gilts following the Budget. One (imperfect) measure of this is the difference between 10-year government bond yields in the UK and in Germany, which has widened by about a quarter of a percentage point over the last month or so.

This is not a huge move, and talk of a ‘market meltdown’ is premature. Yields have also climbed recently by similar amounts in the US and in Australia, so the UK is not exceptional. Nonetheless, the OBR’s ready reckoner suggests that even just a quarter-point rise in bond yields, official (short) rates and inflation could together add about £5 billion to annual debt servicing costs – requiring even more tax rises to fill the gap.

Second, the Budget also seems have had an adverse impact on household and business sentiment – aka ‘animal spirits’ – even before the main tax measures take effect. Consumer confidence was already wobbling in anticipation of a tight Budget, but the tax increases were larger and broader than most had expected.

Worryingly, then, a trio of snap polls after the Budget – by YouGov, Savanta and BMG Research – all found that many more people expected the overall package to be negative both for the economy and for their own finances than positive.  

This verdict is not necessary right or fair, of course, and it is worth remembering that the recent activity data (including retail sales) have generally been better than expected despite weaker confidence. But there is a real risk that mounting worries about the economic outlook could prove to be self-fulfilling.

Third, the Budget may have further damaged trust in the new government, and hence in any future pledges. Strikingly, the BMG poll suggested that the Tories have regained the lead over Labour for the first time in three years.

We can debate until the cows come home, but many would agree that the increase in employer’s NI broke promises made during the election campaign and in Labour’s manifesto. I am also not sure many are convinced by the evidence presented to support the claim that the Tories left a ‘£22 billion’ black hole.

And I do not recall so many legal challenges, notably those against VAT on private school fees and the restrictions on winter fuel payments, or as strong a backlash as that against the planned changes to inheritance tax on farms. The latter at least may have to be watered down after consultation.

Fourth, the tax increases could backfire once they do kick in. In particular, the adverse impacts on the economy (including wages, jobs and investment) may mean that they raise much less than anticipated, prompting another round of tax rises and setting off another ‘doom loop’. (The OBR has done its best to allow for these second round effects, but this is not a precise science.)

Many smaller business owners are, quite rightly, livid. The combination of higher tax bills and the large increases in minimum wages could trigger a tsunami of closures and job losses – as well as deter many budding entrepreneurs from bothering at all.

Fifth and finally, the additional government spending may fail to deliver the expected benefits. In particular, simply injecting more cash into unreformed public services (notably the NHS) will not solve the productivity crisis, requiring even more spending and more tax hikes further down the road.

Overall, I’m sticking with my initial and mostly negative take. 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, if not impossible, to square with the commitment to prioritise wealth creation and growth. But I hope I’m wrong.

• Applied economics
• Everyday Economics
• financial markets
• Fiscal Policy
• Monetary policy
• Taxation
• UK economy