Labour’s shadow chancellor Rachel Reeves will become the first woman to hold the Budget red box outside Number 11 on Wednesday. However, there will be no “frills” nor a big surprise announcement, as a team of accountants, economists and financial experts have taken back control. Unlike her predecessor Liz Truss who declined an Office of Budget Responsibility forecast in the past, Reeves has requested the full 10-week audit of the public finances to help set out her tax and spend policies. This move has led to a drawn-out timetable of Budget preparation, which in turn caused lower business and consumer confidence, undermining the economy.
Reeves’ Budget this year comes at a notable point in the global economic pivot, with tighter fiscal policies and looser monetary policies being considered as the new normal. The Budget will comprise a wide range of tax rises, with employer National Insurance Contributions (NICs) amongst the top increases. This move would reverse the unfunded 2% cut to employee NICs introduced by the previous Conservative government. Reeves was advised in July to reverse the move altogether, but she decided not to breach Labour’s manifesto promise not to raise employee NICs. The justification for raising the employer NICs has triggered debate as to whether it amounts to the same thing and has raised questions around the Labour manifesto’s wording.
The Budget also includes new fiscal rules with two key parts: the investment rule covering borrowing to invest, which will replace the previous debt rule, allowing for the reversal of a planned £20bn cut to spending on major capital projects and a new “stability rule” that will be the binding constraint for Wednesday. The rule states that all day-to-day spending in departments, welfare, and debt interest must be funded by tax revenue over a certain period. By filling spending gaps with significant tax rises, the strategy aims to establish the Chancellor’s financial credibility, thus demonstrating the credibility to markets that lend money. This approach would not only raise taxes but would keep interest rates low, benefiting households and businesses.
Whilst anticipating some backlash from wealthier taxpayers and negative headlines, the Treasury’s long-term plan is to invest in the public realm, including transport, town centres, housing and underperforming public services like the NHS. Labour’s mandate reflects public desire to rectify such deficits, and the fiscal plan will provide the means to achieve this goal through significant tax hikes. As a result of the pandemic, Reeves’ Budget will be analysed closely, and its impact will be felt and scrutinised for years to come
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