Never has a budget been so comprehensively pre-announced as this one, and not since Norman Lamont’s post-European Exchange Rate Mechanism departure budget of 1993 has one been so dressed in doom, gloom and tax rises.
The strategy seems to have been that if Rachel Reeves’s tax rises, and changes to borrowing rules to allow a larger deficit, were trailed practically every day for a month then no one would be surprised when they are unveiled on budget day and there would be no repeat of the unravelling of Liz Truss’s mini-budget of just two years ago.
Assuming there are tax increases equivalent to some £35bn to £40bn a year and a low tens-of-billions increase in borrowing to pay for new national infrastructure, then there was never much risk of a market meltdown like in 2022. That was caused by a massive £80bn surge in borrowing, more than half of it to pay for unfunded tax cuts. Nonetheless, trailing the extra infrastructure borrowing, and the change in the debt rules to accommodate it, was a wise move to ensure no market surprises.
However, going on and on for weeks about tax increases and spending “black holes” guarantees that this will be seen as the Massive Tax Hike budget, when the overall tax increase (as a share of national income) is likely to be similar to Lamont’s in 1993. Maybe that sobriquet was unavoidable, but it is now a virtual certainty.
The big question is whether this is a big enough tax increase to deal with the huge NHS backlog of 7.6m people on waiting lists, while also avoiding austerity in the wider public services. If it isn’t, there will have to be another tax-raising budget next year, or the Starmer government will be in the worst of both worlds, saddled both with big tax increases and a return to austerity.
A lot depends on the growth rate over the next year, which will have a crucial bearing on tax receipts. The latest OECD projection of 1.1 per cent growth this year, and 1.2 per cent next year, would probably keep the wolf from the door if it is achieved, but it will be precarious.
The government’s failure to reopen Boris Johnson’s disastrous Brexit trade deal with the EU is a big limiting factor on growth. Brexit has already cost the economy some £140bn, with an economic output of 6 per cent less than if the UK had remained in the EU, according to analysis by the consultancy Cambridge Econometrics for City Hall. The Brexit penalty will escalate as red tape and trade barriers continue to sabotage EU imports and exports.
Then there is Trump. Is he serious about massive new tariffs over and above those already levied on China to protect key industries? Does he really believe that he can slash income tax by creating a high tariff wall against both Europe and Asia? If he wins and embarks on this course, there is little Starmer or Reeves can do to limit the damage to the global economy—and British growth.
