And so we have the first Labour budget, the first from a female Chancellor of the Exchequer too. And there’s an awful lot to take in – both tax and spend, as well as borrow, obviously.
In terms of numbers, what are the highlights?
Revenue items
- The increase in Employer National Insurance Contributions from 13.8% to 15% – raising £25.7 billion per annum by 2029/30
- Increasing the rates of Capital Gains Tax from 10% and 20% to 18% and 24% – raising £2.5 billion by 2029/30.
- More HMRC staff in compliance and debt recovery – raising £6.5 billion by 2029/30.
Spending
- Investing in public services – an additional spend of £55 billion per annum by 2029/30.
- Additional capital spending – an additional spend of £23 billion per annum by 2029/30.
- Targeting fraud and error in the welfare system – reducing spend by £5.5 billion by 2029/30.
There are also funding commitments of £11.8 billion for the Infected Blood Compensation Scheme and £1.8 billion for the victims of the Horizon IT scandal.
So, big numbers, and a lot of close scrutiny to be done.
In response, from the Liberal Democrat benches, Ed Davey said:
I worry that the Government is still ignoring the elephant in the NHS waiting room: the crisis in social care. I urge the Government to end the dither and delay and begin cross-party talks on social care now.
I’m glad that the Chancellor has listened to Liberal Democrat calls for more investment in the NHS to start repairing all the damage done to local health services by the Conservatives. We will now hold the government to account on delivering its promises so people can see a GP or dentist when they need to.
On the government’s increase to employers’ National Insurance, he added:
It is very concerning to see the Chancellor repeat a number of the Conservatives’ mistakes today. Raising employer’s National Insurance is a tax on jobs and high streets, and it will make the health and care crisis worse by hitting thousands of small care providers.
Instead of raising the money we need by reversing Conservative tax cuts for the big banks, or asking the social media and tech giants to pay a bit more, the Chancellor has chosen unfair tax hikes that will hurt the hard-working families, small businesses and family farms that are the engines of our economy.
I’m sure that readers will have their own views, and we’ll cover this further in the days ahead no doubt but what’s your immediate reaction, everyone?…
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23 Comments
The tax increases of £40 bilion are at the top end of expectations and the spending increases are front loaded over this year and next year.
As Vince Cable noted in his budget artcle public debt is offset against asset creation in a revised fiscal rule that effectively increases the level of borrowig avalable for investment.
The lack of any action on social care and issues like the two child limit are a concern. The OBR said, as a result of the budget, the tax burden will reach “a historic high of 38% of GDP by 2029/30″ and predicted inflation and interest rates will both be higher while forecast GDP growth remains largely unchanged (at circa 1,6%)in five years”.
The spending review will come next spring. It seems likely that taxes will have to rise further still in a couple of years time, if non-proteced depatments are to receive adequate funding.
Reeves’ new attack on those working, or who have worked, in the private sector has gone unnoticed. Private sector occupational pensions are usually Defined Contribution; we have individual pension pots; rather than the Defined Benefit pensions available in the public sector. Public sector employees never need to worry about running out of money when they take their pension because their pensions are guaranteed for their whole life. Having a Defined Contribution pension means one either has to take out an annuity from an insurance company, not usually a good deal because they will be making a profit on it; or use income drawdown, which has become increasingly popular because until now one can pass on the residual amount left in the pension pot outside one’s estate when one dies. Now the residual amount will be part of one’s estate and taxed at a 40% marginal rate for IHT, with the recipient still having to pay again at their marginal income tax rate for any money they take from it if one lives to the age of 75 or older. This is double-dipping by the Chancellor.
When I worked in the city the boss got everyone set up as a contractor/self employed to avoid paying nic. Employees already pay heaps more tax than self employed. Not only is that unfair, it encourages tax evasion. Increasing employers nic only makes this worse. I don’t understand why no-one in the media is talking about this.
My first thought is that Labour are being a good deal more ambitious than I expected in repairing the damage done by Austerity.
My immediate reaction is that the tax rises are not enough to cover projected spending increases. It follows Labour is relying on growth at a time when sluggish growth is expected and borrowing is at historic highs. It’s a high risk strategy.
Where are the environmental taxes on flying (aside a swipe at private jets) and actual implementation of the fuel tax escalator? They would be much better than the NI increase on employers – a real disincentive to get people into employment.
I’s the most political budget I can recall since early the early Thatcher years both in presentation and content
@Lawrence. That’s very cheeky and once again public sector gets special treatment. Doesn’t seem fair.
@Russell
Actually the private sector did have defined benefit schemes in the distant past but stopped using them.
I’m retired (long time) on a defined benefit scheme (existing scheme members were able to continue them).
@nonconformistradical
They stopped using DB pensions because they became too costly to fund. It’s only when you are a Government that you can offer DB pensions without funding them because you can pay them out of current taxation. I only had one, but the company went bust (fortunately I had transferred out of it long before).
@ Laurence Cox & @nonconformistradical
DC also had the benefit of being much simpler to operate, removed the “overfunding” and thus tax risk and transferred the underfunding risk from the employer/scheme to the individual.
As for costs, basically if you want to retire on 40/60 then you need to be saving circa 25% of your salary for 40+ years. Obviously, with DB schemes being a collective scheme payout risk calculations could be taken which reduced the payments individuals actually contributed.
I find it interesting just how well overfunded the mine workers pension scheme is, to the extent it has been paying £400+m Pa to HMRC for some years…
“ or asking the social media and tech giants to pay a bit more”
These are multinationals operated from overseas. Because in the main they run their UK operations as cost centres, there is little incentive for them to elect to pay more taxes. However, given the motivation is to make the UK attractive for R&D investment (ie. Higher skilled and higher paying jobs), increasing employer NI seems to be a reasonable way to get these foreign companies to increase their contribution to the running of our society.
The need now is to make it harder for them to bring in staff who are paid overseas and thus avoid paying UK employment taxes.
I see Rachel Reeves is parroting claims by the so-called “Office of Budget Responsibility” that the government’s budget will soon return to surplus.
“2025-2026: The budget is expected to be in deficit by £26.2 billion
2026-2027: The budget is expected to be in deficit by £5.2 billion
2027-2028: The budget is expected to move into a surplus of £10.9 billion
2028-2029: The budget is expected to be in surplus of £9.3 billion
2029-2030: The budget is expected to be in surplus of £9.9 billion”
We’ve heard all these kinds of claims before. If correct, they will mean that the economy is both losing money back to the government and losing money overseas to pay for a net import bill. It will be in a very sorry state indeed in a couple of years time if these figures are anything like right.
Fortunately for us all they won’t be. There’s no chance of that.
Reeves has of course selectively quoted from the comments of the OBR, and ignored their overall analysis, which was not particularly favourable. Their full published comments are worthwhile perusing in detail, particularly their view on where the overall British economy will be by the close of the decade.
Inevitable Hunt’s response was equally misleading. But where, oh where, has been the LibDem response – in p-articular, where has there been any mention of the detailed LibDem alternative budget, as discussed in these columns on previous days? I know that the media are largely ignoring anything that the LibDems are saying following the General Election, but we should be devoting all our energies to publicising exactly what the we would have done had it been our Budget to propose.
These are a couple of comments that I’ve seen about the RR Budget:
“Tax on draught beer cut”
Rachel Reeves is taking the P*ss! She’s said it’s to ” shave a penny off a pint in the pub”.
My usual pint costs me £4.30. So it’s going to be £4.29 from now on, is it? I don’t think so! Pubs usually round prices up to the nearest 10p to save on handing out copper coins in change.
“There have been no rises in income tax, VAT, or NI”
This is right about VAT – except only In percentage terms but not in £ terms. We all keep an eye on own payslips and so we’ll know that we’ll be paying more tax than we used to. The Aussies call it bracket creep.
NI has gone up for employers so they will be wanting to claw that back the next time our annual pay reviews are underway. We’ll all end up paying one way or another.
Except perhaps if the employer is a pub. They’ll be awash with all those 1p savings from the reduction in draught beer duties and so won’t have any problem at all paying the extra NI charge! 🙂
Peter Martin,
the budget deficits above relate to current spending budgets excluding capital investment spending. Government borrowing was projected to be at 127 billion pounds in the current financial year. Borrowing was expected to fall from 4.5% of economic output this year to 2.1% of GDP by the end of the forecast period.
Public sector net borrowing is forecast to be 105.6 billion pounds in 2025-26 before coming down to 70.6 billion pounds in 2029-30.
Spending as a share of GDP is at 44.6% for 2028-29 (almot 5% above the pre-pandemic level) with 38.2% financed by taxes.
“Half of the increase in spending is funded through an increase in taxes, mainly on employer payrolls, on assets, and through greater tax compliance. These raise £36 billion (just over 1 per cent of GDP) a year in additional revenue and push the tax take to a historic high of 38 per cent of GDP by 2029-30. The other half of the increase in spending is funded by a £32 billion (1 per cent of GDP) a year increase in borrowing, one of the largest fiscal loosenings of any fiscal event in recent decades.” Economic and fiscal outlook – October 2024
“Net debt falls as a share of GDP from 98.4 per cent this year to 97.1 per cent by the end of the decade. But underlying debt, excluding the Bank of England, rises as a share of GDP in every year of the forecast. The Budget sets two new fiscal rules: to deliver a current balance and for net financial liabilities to be falling, both initially in five years”.
@ Joe,
We’ll have to see just how these forecasts turn out. Maybe you could convince me to be somewhat less sceptical by providing some evidence that the OBR have been able to get their previous attempts something like right.
We all know when our meteorologists get their weather forecasts wrong. These days they are actually pretty good. They learn from their mistakes which we might think is the correct approach.
Economists seem incapable of this, though. They get away with far too much simply because of the longer times scales involved. If there is no surplus by 2027-28 they’ll be hoping we’ll have forgotten all about what they predicted in 2024 instead of working to improve their models.
https://www.forbes.com/sites/stevekeen/2015/04/16/you-do-need-a-weatherman/
Peter,
these forecasts will form the basis for the multi-year departmental spending review next spring and set the path for resource departmental expenditure limits (RDEL) for the rest of this Parliament (or more likely two years as they may have to come back for more tax increases in 2027).
The focus of economic management going forward will turn to structural reforms, productivity enhancements and short-term cyclical fiscal adjustments via automatic stabilisers.
I do think that reform of the broader tax and benefits system will be part of that focus.
@Laurence Cox – it’s entirely fair that the IHT exemption for pension pots has been removed. Pensions attract tax relief on contributions, and if your pot was big enough to have much left on death, you were probably getting that at 40%. So hardly “double dipping”, and there is no moral or economic justification for passing on your tax relief to your heirs.
Also, the Tories removed the lifetime limit on pension contributions, so the very wealthy could have parked millions in pension schemes, benefiting from tax relief. If they were lucky enough to earn enough to live on from other sources on income (rental income, savings, investment returns) following retirement without drawing on their pension, that would all have escaped inheritance tax.
The problem for Rachel Reeves, and ultimately all of us, is that the tax rises happen well before the extra spending.
Her budget is not going to be expansionary for at least the next 18 months. She’ll achieve her objective of low inflation but she’ll need the BoE monetary committee to come to her rescue with a significant reduction in interest rates. If they dither, as they have done recently, she can forget about meeting any growth targets she may have set.
The present situation shows up the fundamental problem of having two pilots with different ideas of how to fly the plane. One in charge of the fiscal controls. One in charge of the monetary controls.
What can possibly go wrong?
Peter Martin,
“the tax rises happen well before the extra spending”
According to the Budget book (page 122) in the first year £1.16bn more will be spent, followed by £24bn in 2025/26, £34.785bn in 2026/27, then £39.065bn, £39.725bn and £41.170bn in 2029/30. This means that the extra each year over the previous one will be £1.16bn this year, £22.845bn in 2025/26, £10.78bn, then £4.28bn, £660 million and £1.445bn in 2029/30.
Therefore, the budget in terms of the fiscal changes are expansionary both next tax year and 2026/27, which would explain why the OBR has increased economic growth for 2025 and 2026.
However, additional capital investment increases over the previous year are £1.765bn this year, £13.595 next year, £4.08bn in 2026/27 then £4.38bn, and £1.875bn in 2028/29; followed by a decline of £2.57bn in 2029/30.
@ Michael BG,
The GDP of the UK last year was approx £2720 bn. So your figure of £1.16 bn represents just 0.05% of GDP. We can’t measure GDP that accurately so it’s neither here nor there in the totality of what is happening in the economy.
Your largest figure of £41.17 bn represents 1.5% of GDP which could be slightly reflationary if the rest of the economy is running reasonably well but won’t be if everyone else has cut back on their spending by more than 1.5%.
If we want growth of 2% we have to have 2% more spending if all prices stay the same. If we hit our inflation target of 2% we will need to have 4% extra spending. That’s about £110 bn of extra spending which will have to come from somewhere.
The economic orthodoxy dictates that this should be achieved by reducing interest rates to encourage everyone to borrow more so they can spend more. The danger of this approach is the build up of private debt in the economy which can easily turn into bad private debt and so crash the economy 2008 style.
Peter Martin,
The government does not have to increase the deficit for there to be inflation in the economy. Does not the central bank allow the money supply to increase to create a low level of inflation, if there is no inflationary pressure in the economy?
It is not correct that the government needs to spend 4% extra to get 2% growth in the economy.
I think you have overestimated the GDP of the UK, Statista have it at £2,271bn in 2023 (https://www.statista.com/statistics/281744/gdp-of-the-united-kingdom/ ), so it is in the region of about £2,307bn now.
To look at the size of the stimulus the change from the previous year is the important figure not the change from this year. The highest is £22.845bn next year, which will be just under 0.99% of GDP. As interest rates are likely to stay higher longer because of the budget the extra economic growth could be below 1%.
Michael BG,
I think the figure of £2720 bn must come from the link below. But, all I can remember is Googling the question!
https://researchbriefings.files.parliament.uk/documents/SN02783/SN02783.pdf
I agree there are other figures given on the net which vary considerably. Such is the imprecision of mainstream economists!
You are right that the government’s deficit or debt isn’t immediately linked to the level of inflation. It’s the amount of spending that matters which also isn’t directly linked to the so-called money supply. During the Covid epidemic the Govt was running large deficits but there was no immediate high inflation. This was because the level of spending didn’t increase.
However, later on, when the deficit started to fall inflation did rise. So, the general principle has to be that a rising deficit indicates more saving which isn’t inflationary but a falling deficit indicates more spending which possibly is inflationary
GDP is measured by the amount of spending in the economy. Both by Government and everyone else. So to get 2% growth at the same time as we have 2% inflation the total level of spending has to increase by 4%. I didn’t say it all had to be by Government.
Peter Martin,
If the House of Commons say the GDP was £2720bn in 2023, then it must be correct, but there is no reference for where they got the figure from.