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Rachel Reeves’s Budget is almost upon us. Prepare for economic disaster
Brace for a blizzard of welfare giveaways, with all the political pain safely pushed into the future
The final Budget decisions have now been made. The Red Book is at the printers. And the speculation is almost over. Thankfully, there’s still time to make one final point.
Whatever good fiscal intentions Rachel Reeves may have had at the start of the process, they have been abandoned and replaced by a package of measures crafted for one purpose alone: to keep the Parliamentary Labour Party from toppling the Prime Minister for a few more weeks.
The rhetoric on fixing the foundations, prioritising growth, controlling spending and reforming welfare will continue into Budget day itself. But the reality is simpler and rather bleaker. The Chancellor has shied away from every politically difficult decision that might have achieved these aims. Instead, taxes will go up to pay for the expanded welfare state that Labour MPs have demanded. And serious fiscal consolidation will be abandoned for the rest of this parliament.
Having ditched plans to raise income tax rates, rein in public spending or get a grip on welfare, the Chancellor is left with a series of tax rises that are mostly deferred into the future alongside spending increases that start immediately. This is a slow-burn recipe for political and economic disaster.
Most of the additional revenue the Chancellor will raise comes from continuing the freeze on income tax and National Insurance thresholds. This money doesn’t arrive until 2028.
The same is true for the revenue from the new pay-per-mile tax on electric vehicles and the new mansion tax, both of which are also slated to come into effect in 2028. In the latter’s case, it seems that payment can be deferred until someone moves house or dies, further delaying when this revenue will actually be collected.
Other likely tax rises include an increase in gambling duties and dividend taxes, plus a reduction in cash Isa limits and a cap on salary sacrifice schemes. Between them, these might raise £5bn to £6bn from next year onwards.
But that barely covers the cost of policy reversals on winter fuel payments and disability benefits reform, let alone the abolition of the two-child benefit cap.
Nor will it pay for the continued freeze in fuel duty which, if the Chancellor’s words on inflation and the cost of living are to be taken seriously, must surely be on the cards. We also don’t yet know if the freeze on rail fares will mean a bigger subsidy to rail operators or, indeed, what other cost of living measures are planned. In the near term, I can’t see how the sums add up.
There might be a few other revenue raisers, and there will be yet another crackdown on tax and benefit fraud, but nothing that changes the overall profile of the Budget’s tax and spending plans significantly. Spending is going up now in order to placate Labour backbench MPs, with the tax rises needed to pay for this spending spree not scheduled until 2028 and beyond.
The tax rises that do bite early, like those on gambling or investors, are only really those that are likely to be cheered by Labour backbenchers. The end result will be a Budget blizzard of short-term welfare giveaways with all the political pain safely pushed into the future. The Government can only pray the public barely notices the whole sorry affair.
There are two obvious and connected problems with this approach.
Firstly, the markets are unlikely to buy into it. Having signalled a serious intention to pursue fiscal consolidation, only to row back from it, the Government has invited enhanced scrutiny on what is planned for borrowing levels in the next year or so. If the markets see something they don’t trust, then even the extra headroom the Chancellor creates may disappear as gilt yields rise.
Secondly, this Labour Government, and this Labour-dominated parliament, has confirmed it is incapable of doing anything other than increasing taxes and increasing spending.
Further half-hearted attempts at controlling spending may periodically appear, but they too will be stamped out by the Parliamentary Labour Party and replaced at each Budget with yet more tax rises and more welfare spending.
This pattern is now firmly established.
No alternative leadership of the party will improve things on that front. In fact, they are likely to make things worse and ditch even the pretence of trying to control spending.
This means that Labour will continue to limp from Budget to Budget for the rest of this parliament, slowly squeezing the life out of the country while insisting they have no choice.
This fiscal mess is now unfortunately baked in, and it won’t be Labour that clears it up.
[Source: Daily Telegraph]
