UK Chancellor Rachel Reeves has presented a Budget she repeatedly described as being “for growth”. However, according to the UK’s official independent forecaster, all the measures in the Budget do not boost the economy in the next three to five years. The National Insurance rise for employers is likely to hit private investment and weigh down disposable income. While this result may be disappointing for the chancellor, it is not wholly unexpected. Reeves will need the economy to outperform the Office for Budget Responsibility’s (OBR) expectations.
Reeves’ strategy is to prioritize longer-term infrastructure investment and reforms that will help growth over the next 10 to 15 years. However, the short-term and long-term growth seem like a small return for such a big Budget. The spending bump, £70bn a year, amounts to 2% of total UK economic output and brings the size of the British state close to European levels, half of which is funded by one of the biggest tax-raising budgets outside of a recession, with the other half being raised with a significant increase in borrowing.
The National Insurance rise for employers is one of the biggest single tax-raising measures in history, raising £20bn a year in total. The chancellor’s focus on fiscal responsibility appears to be aimed at placing blame on the former Conservative-led Treasury for crimes against spending forecasts. Reeves claims that the OBR’s forecast at the last Budget would have been “materially different” had the Conservative-run Treasury been clearer about spending, and she also claims that the Conservatives covered up the need for spending rises, leaving Labour with a shortfall.
Public services will receive an immediate injection of funds, drawing a line under the years of austerity, at least until a longer-term spending review. While ordinary taxpayers were spared a further freeze in income tax thresholds, it is difficult not to describe this as a £20bn tax on jobs. The gamble here is that the economy is in robust enough health to deal with it.
This Budget represents a big change of direction in terms of Britain’s economic story. The extra spending the public seemed to accept since the pandemic will not be rowed back from continental European levels. There is another message in this Budget: this is a one-off. Reeves’ Budget is intended to deal with a specific issue created by Conservatives’ unrealistic spending plans and is unlikely to be followed by a similar Budget for a while
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