Rachel Reeves’ second budget has some things which we should like plus some things we should dislike.
Ed Davey shouldn’t attack the government for increasing the tax burden. We as a party should accept that people want better public services and this means that the tax burden has to increase.
We should welcome the ending of the two-child benefit cap which has been our party policy for years. Ed has welcomed the changes to fund three-quarters of the cost of the increased use of renewable energy from the government rather than consumers, which will reduce energy bills. We should welcome the near doubling of the Remote Gaming Duty. I think we should welcome the extra 2% on the all three income tax rates for income from property and savings. However, should the income tax rates for dividend income have been increased by more than 2% particularly at the ordinary rate?
We should welcome the support for retail, hospitality and leisure by reducing their business rates. We should welcome the Mansion Tax on homes above £2 million. We should welcome the extension of Air Passenger Duty to private jets over 5.7 tonnes. We should welcome the £2,000 cap to salary sacrifice as it is mostly those on higher incomes who can afford to do this.
We should oppose the introduction of VAT on the Motability Scheme making the cost of having a suitable car more expensive for disabled people. Perhaps we should oppose the 3p per mile tax on Electric Vehicles. However, this had to be introduced at some time as the total revenue on petrol duties reduces because of the switch to Electric Vehicles.
We oppose the freezing of the income tax allowances and National Insurance thresholds for a further three years. The freezing of the personal allowance and NI threshold according to the figures in the budget will raise £3.655bn in 2028-29, £8.395bn in 2029-30 and £13.36bn in 2030-31. It would seem that if these freezes were not proposed the day-to-day budget surplus would be reduced to £245 million, £13.3 billion and £11.24 billion. Therefore it would seem that these freezes are not necessary.
We can be disappointed that there wasn’t a windfall tax on the banks who ‘are making billions at the taxpayer’s expense due to … quantitative easing’ (Ed Davey 26th November). Plus that there was little in the Budget for carers, including changing the carer’s allowance system.
We might want to save £1.8 billion by scrapping digital ID. The Parliamentary Party wants an emergency 5% VAT cut for hospitality for the next 18 months, but it was not in our new policy on supporting hospitality passed in September. Party policy is to create new employer rates of National Insurance for hospitality businesses at the pre-increase rate of 13.8% down from 15%.
Government investment spending has been increased from spring 2025, but it declines from 2028 as a percentage of GDP. Hence the low growth rates of only 1.5% from 2027 and 1.4% in 2026. However, the unemployment rate does drop from 4.9% in 2026, to 4.6%, 4.3%. 4.2%, ending at 4.1% in 2030. The Chancellor has also boasted that ‘according to the IMF the UK will reduce borrowing more over the rest of this parliament than any other G7 economy’.
However, if unemployment is forecast to be over 4% in 2030-31, can that be said to be an economy that is blooming? I don’t think so. 1% of the working-age population is about 455,000. If these people were in work earning £32,570 a year, this would raise more than £5.59bn government revenue. Therefore I think it should be possible to spend an extra £6bn a year over the last three years on measures that either get unwell people well enough to work, or unemployed people employable.
The size of the economy is about £2,900 billion. The issue for this budget should have been how to increase growth. It would seem that if the government spent an extra £21bn on investments the economic growth rates would increase by about 0.75%. Therefore the Chancellor should have proposed investing £21bn in the year 2026-27. This extra investment could be reduced to £16bn in 2027-28, £11bn in 2028-29, £6bn in 2029-30 and nothing in 2030-31. (This is an extra £54bn of investment in those four years.) If my figures are correct the figures for the amounts to be spent on investment for last three years would be £102bn, £96bn, and £92bn.
Therefore it would have been possible to increase government spending by a further £92 billion and reduced the government’s revenue by £25.41 billion without breaking the government’s financial rules.
* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. He posts comments as Michael BG.
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17 Comments
The Mansion tax may turn out to be a bit like the farm tax. Sure, everyone dislikes London but Labour has a few MPs there and we’re talking about regular terraced houses included. And all for small change years in the future. Politics rather than thought ot plan. They could have reformed the whole system. And bashing employers again and those working in the private sector with the salary sacrifice change is very unwelcome. Labour backbenchers have forced Starmer to lurch to the left but this (and last year’s) budget, taking taxes up even higher, was not what people voted for so it will further erode the faith British people have in politicians.
“ We as a party should accept that people want better public services and this means that the tax burden has to increase.”
This is true, but was not the reason for the tax rises in the budget. More income tax will be extracted from working people to finance an increase in benefits and pensions, and to provide a bigger buffer in case of economic headwinds…no extra spending on the NHS or education was announced in the budget.
Thanks Michael. I actually liked Ed’s summary statement “You can’t tax your way to growth”. I have worked extensively on fiscal models, and they always show that even a modest increase in PER CAPITA growth eases the pressures on the fiscus considerably. This Govt seem to accept that the size of the pie is fixed and so if we want more money for anything it has to come from increased taxes. Yet if we had PER CAPITA growth as we had in the 1990s/early 2000s (pre GFC, pre Brexit, pre Covid, pre Russia invading Ukraine) – we could have lots more for everything at the same tax/GDP rate.
Pub owners reckon their rates are going up by 76% next year.
“Rachel Reeves’ second budget has some things which we should like plus some things we should dislike.”
Things you like: More spending on welfare etc
Things you don’t like: Any new taxes
Do you get why that doesn’t add up?
“a windfall tax on the banks who ‘are making billions at the taxpayer’s expense due to … quantitative easing’
The profits that the banks are making don’t come from the QE program. This was designed to force interest down which it successfully did. If BoE enters the bond market as a buyer (QE) it will push up the price of bonds and so lower the effective longer term rate of interest.
The profits have come from the decision to partially reverse the process by requiring the BoE to sell bonds, Quantative Tightening or QT, and so push down their price and increase interest rates.
The idea that interest rates are somehow set by the bond traders is incorrect. We could have zero interest rates next week if the BoE restarted its QE program with sufficient vigour and the monetary committee of the BoE opted to reduce short term interest rates ie the Bank Rate.
They won’t do that because they are concerned that the pound’s value on the forex market will fall.
So the commercial banks will argue, with some justification, that they lost out when QE was in progress so they should be allowed to benefit when the opposite (QT) is happening.
Of course if the banks were Nationalised , none of this would matter in the slightest. I can’t see this being Lib Dem policy any time soon though! 🙂
“Therefore it would have been possible to increase government spending by a further £92 billion and reduced the government’s revenue by £25.41 billion without breaking the government’s financial rules”
I don’t quite follow your logic to get this figure of £92 bn. For one thing the Govt is ideologically opposed to direct investment in the economy except perhaps to underwrite the potential losses of private investors.
However, if the Government spent an extra £92 bn into the economy it would come back as taxes unless the recipients of the spending saved it somehow. Where else can it go? So the revenue would not fall by £25.41 bn. The increased spending would cause it to rise.
This doesn’t mean that there’s even more reason to spend the £92bn. The effect would be to increase inflation unless somehow the unemployed became economically productive and generated more output.
This and your previous point about QE and QT shows that the idea of adjusting interest rates to regulate the economy generally, and inflation in particular, as well as adjusting taxes and spending to regulate the Govts deficit is, to put it mildly, somewhat misguided.
@Paul,
“I have worked extensively on fiscal models……… Yet if we had PER CAPITA growth as we had in the 1990s/early 2000s (pre GFC, pre Brexit, pre Covid, pre Russia invading Ukraine) – we could have lots more for everything at the same tax/GDP rate.”
We have had lots of GDP growth in the last 50 years but we don’t all feel a factor of 3 (or whatever GDP has increased by) better off as a result.
If we are all richer then the price of land and housing increases too. If GDP increases then teachers, doctors, nurses and all workers in general want to share in the increased prosperity so they become more expensive and we end up not being able to afford any more of them than we did previously. We seem to find it harder to afford many things that we used to. Local policemen. Park keepers. Real people to sell us tickets at railway stations etc
Is this effect included in your models?
This is not to say we shouldn’t aim for more growth but we do need to be realistic about its limitations. So ” we could have lots more for everything at the same tax/GDP rate” ???
Not really!
Russell,
It shouldn’t surprise us that the Labour Government hasn’t the guts to reform the whole council tax system. Our own policy is only to review the case for replacing council tax with a simple percentage-based annual property tax based on up-to-date valuations.
Jenny Smith,
As I point out there was no need for the freezing of Income Tax allowances and National Insurance thresholds. So it wasn’t required for removing children out of poverty. It was only required for there to be bigger headroom.
George Lees,
‘Do you get why that doesn’t add up?’
But it does add up. In paragraph six I point out how much revenue the freezes would raise and then point out the size of the day-to-day budget surpluses if these tax rises were not included in the budget.
Peter Martin,
It is my understanding that quantitative easing includes the Bank of England actually creating money to add to the banks reserves. Even without this creation of new money, quantitative easing would increase the banks reserves at the Bank of England. It is the interest of these extra reserves that I think Ed was talking about.
My premises are that the extra investment spending would result in more people being employed, and that the extra spent on getting unwell people well enough to work, and unemployed people employable would increase the pool of people who could be employed.
@ Michael BG,
You’re right that the BoE can simply create money which inevitably ends up in the commercial banks’ reserves (their account at the BoE) when they use it to purchase bonds. If they hadn’t purchased the bonds the banks would themselves have ended up owning them. Bonds pay a yield whereas reserves didn’t used to. So the idea, after QE began in earnest after the 2008 GFC, was to compensate the banks for the loss of income on their bonds by paying interest on their BoE reserves.
This didn’t matter much to start with when interest rates were low but now that they are higher, and the Govt wants them higher, it is perceived to be a problem. The banks naturally will do whatever gives them the best return. At the moment they go along with putting their money into their BoE accounts. However, if the government starts to tax these, they may well switch back to owning bonds. Which the govt doesn’t want them to.
So the problem isn’t so much the payment of interest on reserves as the level of interest rates themselves. But, the Government can’t have it both ways. If they want interest rates to be high they have to accept the consequences like anyone else.
@Peter Martin
The reason we don’t feel better off is that people tend to spend greater income on things they would have likely but previously couldn’t afford. Net result is that people may still find they have spent all their money at the end of the month and finances still feel tight as before. However, compare how people tend to live today compared to 50 years ago and we are hugely better off. For example, look at the growth in car ownership over the last 50 years.
@ Jenny,
“For example, look at the growth in car ownership over the last 50 years.”
There are downsides of widespread car ownership. Such as public transport being less economically viable than it used to be – except perhaps in the cities where the imposition of high parking congestion charges and discourages car use. Then there is the pollution and noise caused by cars which have an adverse effect on all our health.
Children used to be able to play in the street at one time, but not now.
Peter Martin,
It would make sense for the Bank of England just to create money to buy government bonds during quantitative easing. They don’t just buy from banks. I have read somewhere that they also create an equal amount of money and add it to the bank’s reserve accounts.
I don’t think the Bank of England cares who owns government bonds. My understanding is that government bonds pay the bank rate and the market determines the price.
Ed is not talking about taxing the bank reserves. He is talking about a windfall tax on the bank’s profits similar to the one we proposed on the energy companies.
@ Michael BG,
Yes, you’re right it would make more sense for the Govt to trade directly with the BoE. However, this is known as Direct Financing or Monetary Financing and there is a strong taboo against doing this in conventional financial circles. QE is a sort of work around. The government will sell bonds to a third party in the full knowledge they’ll resell them to the central bank. It’s a nice earner for the third party!
I’m not sure how the banks do their accounting on the holding of bonds. I was thinking that the profits didn’t show up until the bonds matured whereas the interest on reserve deposits shows up straightaway. If so the windfall tax on bank profits could be regarded as an effective tax on BoE interest payments and encourage the banks to move back into bonds. Maybe I’m wrong in this?
But in principle it doesn’t really matter if the banks are being paid 5% on their reserves or they are making 5% on bond yields. They’ll be doing just as well either way. It’s curious that the complaint about bank profits is only being made now that the banks are being interest of 5% but there were no complaints in the past when yields on bonds were this high or even higher.
Peter Martin,
The windfall tax was first proposed by the Institute for Public Policy Research (IPPR) in August this year (https://www.ippr.org/media-office/thatcher-style-tax-on-bank-windfalls-could-raise-billions-for-public-services-says-ippr) and announced by Daisy Cooper as party policy in September! At the general election we were advocating restoring the Bank Surcharge and the Bank Levy, for the big banks, to 2016 levels in real terms. The IPPR article states, ‘Since interest rates began rising in December 2021, the four largest UK banks have seen their annual profits more than double, up by £22 billion compared to pre-pandemic. IPPR says that some of this is a direct transfer of funds from the taxpayer to shareholders.’
I agree with the IPPR that the Bank of England should stop its quantitative tightening (QT), which I think shouldn’t be done when we want higher growth and unemployment is rising. They also say that doing both ‘could save the taxpayer over £100 billion over the course of this parliament’.
@ Michael BG,
I agree too that QT should stop. It’s purpose is to force up longer term interest rates whereas the purpose of QE is to lower them – so just the opposite. It’s a bit odd that there is suddenly a lot of concern about the ‘cost to the taxpayer’ of high interest rates when higher interest rates are what Govt wants.
So why is Govt intent on pushing them up? The only reason I can see is to push up the value of the £. There’s a short term benefit in lower inflation but in the longer term it causes exports to be less competitive and imports to be more competitive. This external deficit than translates back to an increased internal govt budget deficit. Money lost to overseas sellers can’t be taxed only borrowed back.
Govt then gets concerned about their deficit being too high so this adds pressure on the BoE to further increase interest rates and also slow the economy by fiscal contraction.
It’s Alice in Wonderland economics. It’s hardly surprising nothing seems to work as it should.
Peter Martin,
I don’t understand why you think the government wants higher interest rates. Publically they talk about wanting lower interest rates. Also lower interest rates would reduce the cost of interest payments for the government as well as in theory stimulating economic growth.
It seems that I made a mistake in the article, thank you for pointing this out. £54bn for investment plus £18bn for the suggested help to get people more employable equals £72bn.