This Budget was the one that Labour always promised to deliver – if you listened closely enough. As I wrote before the election, Keir Starmer and Rachel Reeves’ pledge to “prevent austerity” was only achievable through larger tax rises. These, I suggested, would be imposed after Reeves discovered “the books are worse than thought”. That’s exactly what has happened.
The £41.5bn of tax rises announced by Reeves put the UK within touching distance of the western European norm (a tax take of 38.2 per cent of GDP will leave us level with the Netherlands and not far off Germany). Combine this with a new industrial strategy, stronger workers’ rights and the highest public investment since Harold Wilson and a distinctively social-democratic model emerges.
Economic growth is critical to this approach – improved public services and higher living standards for workers depend on it. The problem for Labour is how little of it is predicted. GDP growth is forecast by the Office for Budget Responsibility to average just 1.66 per cent across the five-year period (after a temporary rise to 2 per cent next year). And remember, despite its gloomy reputation, the OBR has generally been overly optimistic in the past.
The outlook for living standards is even grimmer: they are projected to rise by just 0.5 per cent a year on average across the parliament, only slightly higher than growth during the previous Conservative term (0.3 per cent). This, the Resolution Foundation notes, would be the worst performance under a Labour government, lower than the 0.8 per cent growth recorded in the 2005-10 parliament.
Are there any glimmers of hope for Reeves? Labour aides point out that the OBR hasn’t accounted for the potential boost to growth from the government’s planning reforms (as they have yet to be finalised). But these alone won’t have the transformative effect that the Chancellor seeks.
Reeves insists that she doesn’t want a return to either austerity or ever-higher taxes – yet that is the unpalatable choice she faces. Spending on unprotected government departments is currently due to fall by 1.1 per cent a year in real terms after 2025-26. In common with her Conservative predecessors, Reeves has deferred rather than cancelled cuts.
Higher economic growth would help ease her dilemma. That’s one reason we can expect an increasingly animated debate about how to achieve it. Looming over the Budget was Brexit – a word mentioned just once by Reeves (“their Brexit deal harmed British businesses”, she noted of the Conservatives). The OBR’s judgement is as unambiguous as ever: it expects Brexit to “reduce the overall trade intensity of the UK economy by 15 per cent in the long term”.
I’ve long noted the irony that, far from becoming “Singapore-on-Thames”, Britain has embraced a more European model since Brexit: higher taxes, higher spending, more regulation. That is more the case than ever under Labour.
But what still separates the UK from its European peers? It isn’t a member of the single market. As the debate over Labour’s next manifesto begins, this inconsistency will become increasingly apparent.
[See also: Labour has imposed a £19.5bn stealth tax]
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