Labour’s Budget dilemma

The tension between a pledge to limit tax rises and the party’s rule against borrowing for day-to-day spending is showing.

By New Statesman

Photo by Anthony Devlin/Bloomberg via Getty Images

The first Budget of a new parliament is always significant. But the plan to be announced by Rachel Reeves on 30 October could define the British economy for at least the next decade. From the moment the previous chancellor, Jeremy Hunt, arrived in office in 2022, he would have been aware that the Conservative Party’s time in power was limited. He had little incentive, therefore, to be frank with the public about the true state of Britain’s finances. Ms Reeves has the opposite impulse. It is in the new Chancellor’s interest to be as forthright as possible about the public finances, in order to justify the measures needed to repair them.

As the Chancellor recently told Andrew Marr, in July she inherited not just a dire fiscal outlook but an “immediate crisis” – a gaping hole in day-to-day spending from which the previous government “ran away”, as she puts it, by calling an early election. But the problem is greater still. Tens of billions more are needed to stabilise public spending, and if this government is to improve Britain’s ailing public services, then still greater levels of spending will be required.

Ms Reeves is positioned between two commitments. Labour has pledged not to raise income tax, national insurance and VAT, but the first and most important of her fiscal rules is that the government will not borrow to pay for day-to-day spending. This is vital for a country spending almost £90bn a year on debt interest, but the Office for Budget Responsibility also forecasts ever-increasing spending pressures from an ageing society, poor public health and climate change. To solve this fiscal puzzle, the economy must grow and taxes must be raised.

On 14 October the government held an investment summit at which the heads of some of the world’s largest companies were encouraged to see Britain as a good place to do business. By the end of the day, the Chancellor was able to claim that £63bn in new investment had been pledged by businesses and that 38,000 new jobs would be created. Labour has already helped stabilise the calculations of businesses considering investing in the UK. The simple commitment to maintain corporation tax at the same level for five years makes such planning easier, and Keir Starmer’s promise at the summit to “rip out bureaucracy” and make economic growth the primary test of regulation, will be encouraging to employers.

For many companies, however, what creates the potential for investment is the country itself: the availability of healthy, skilled workers, the likely path of borrowing costs, the demand and confidence in the consumer market. As Paul Collier, the author most recently of Left Behind: A New Economics for Neglected Places, has written for the New Statesman, the UK suffers in this respect because it is two countries. The “magic triangle of London and Oxbridge”, in which less than a quarter of the population lives, abounds with economic opportunity and risk-seeking capital in a way that the rest of the country does not. This disparity is reflected in health outcomes, infrastructure spending, education and housing.

The government’s new industrial strategy, however, is aimed at growing the sectors already doing well, many of which (financial services, consultancy, the creative and digital industries) are over-represented in this fortunate area bounded by London, Oxford and Cambridge. The new investment funds it is creating have their own priorities, such as achieving net zero, but to make the whole of the UK an enticing prospect for investment there must be significant stimulus of the towns and provinces from the state.

Ms Reeves must show the public that there is a clear long-term plan, because her Budget will not be popular. Increases to employers’ National Insurance contributions will be seen, rightly, as a tax hike on workers because businesses will factor them in to future pay decisions.

If, as has been reported, the Chancellor maintains the current levels of pension tax relief, she may be seen as attempting to bribe public sector workers (and the powerful unions that represent them) while raising taxes by stealth on those in the private sector. The removal of tax reliefs for entrepreneurs or the unfreezing of fuel duty could well be met with hostility by businesses.

More than this, it will take a clear sense of where the country is going under Labour for workers and businesses to accept that a painful Budget is the beginning of a coherent project of national renewal.

[See also: 100 days that shook Labour]