A red budget

Labour's first budget was big on taxes, but little on growth

The Chancellor of the Exchequer is, by tradition, allowed to drink whatever they want during the Budget. The last person to take advantage of this was Ken Clarke, who drank a whisky while delivering his Budget. 

Rachel Reeves opted for a glass of water during her 90-minute plus Budget speech. Her delivery was confident, with a few pretty good gags at the expense of Rishi Sunak, and seemed well received by her rowdy backbenchers. 

The headline was a £40 billion tax raid, civil service cuts, but a spending spree on the NHS and education. They’ve certainly averted disaster the Tories were leading towards, and bought themselves a bit more time, but was it bold enough?

Technically true 

It was very obvious that Labour would be forced to raise taxes. The government spent in excess of £400 billion getting us through COVID-19, the country’s public services are in a dire state and the last government cut taxes. Their plans cost a lot of money, and Rishi Sunak even warned the public that Labour would raise taxes (Sunak is nothing if not prescient: he also predicted that Liz Truss’ plans would send mortgage rates soaring). 

Labour slightly backed themselves into a corner by repeatedly promising during the election campaign that they would not raise taxes on working people. It may have been important for winning - and they were right not to take any chances - but they seem to slightly regret it in the harsh light of government. 

Their options, then, were limited. They could follow in the footsteps of Australia’s ex-PM Tony Abbott and break a promise not to raise tax. After all, manifestos are not at all binding. But that approach would likely risk costing them the next election. Alternatively, they could raise every tax other than the three that they defined as taxes on ‘working people’. The latter is what they chose: employers’ NICs up; capital gains up; stamp duty on second properties up dramatically. 

But, even Labour detractors have to admit it’s a pretty impressive Budget that raises £40bn for the government coffers with almost no hit to most working people. In fact, a lot of people will find themselves better off: carers can now work more and retain their carers’ allowance, minimum wage workers will make more money, and pint-drinkers will save a penny on their beers. 

Of course, some people are unhappy at any tax raises. Part of the problem is that the median voter wants taxes lower and public services better. 

Delivering both is near impossible; those countries with the most impressive public infrastructure and public services have high tax brackets. 

Making money

Though it doesn’t have to be this way. 

There’s a slight obsession with framing government spending through the lens of a household budget. We imagine Rachel Reeves with a credit card and a bank account: trying to load up her current account and avoid using the credit card.

But the government is not a household. The ex-Obama economist Stephanie Kelton makes this point: the ‘deficit’ is largely an imaginary construct to reflect the difference between government income and expenditure, it is not literal debt like credit card debt. When we treat governments like households, we limit their potential to make meaningful investments and drive radical change. 

In fact, there’s no better proof that government budgets aren’t household budgets from another of Rachel Reeves’ flagship policies. When I run out of money, I can’t just change the way I count it to find another £50 billion, but Rachel Reeves can. 

The lobbyists, the markets and the public

The biggest problem with Labour’s budget, and one they’ve not been bashed about nearly enough, is that it isn’t delivering the growth they’ve promised. Labour’s entire plan depends on economic growth: if they want to improve the country without raising the core taxes, they need to make us all richer. The Budget they delivered last week, though, did not deliver growth.

The OBR are forecasting that growth under Labour will be about the same as it was under the Tories, and in some cases a little worse. 

If they can’t deliver growth, Labour will essentially fail. After Brexit, the country desperately needs economic growth. It will be the ultimate test of Starmer’s premiership, and it must keep him up at night how little control he has over those figures. 

Reaction to the Budget has generally been muted. The markets wobbled but little more than that (unlike Kwarteng’s, who this week acknowledged his Budget ‘wasn’t perfect’). 

The public seem to be largely positive about the Budget, possibly a sense of relief that what was trailed as a painful budget has mainly hit the richest. The party is up in polling. 

Not everyone was so happy. There’s a lot of mystery surrounding lobbyists, those firms and individuals who are hired to influence policy. Their objective is to shape the government’s policies in such a way that is favorable to their paymasters. The sharpest tool in their arsenal is public opinion.

A shift in public opinion can force the government into an embarrassing U-turn. The Cornish Pasty Association successfully turned public opinion against George Osbourne’s 2012 budget, and in particular his plans for a Pasty Tax. Now, the farmers are trying to do the same. They are very unhappy about changes to inheritance tax. It’s worth saying, it will ultimately affect only the biggest farms: about 1% of all farms. 

Jeremy Clarkson is leading the charge against the policy, though his motives are not exactly pure: his primary consideration for buying a farm was avoiding inheritance tax. The Country Land and Business Association is mobilising the full force of its lobbying to force a U-turn: putting out some slightly ridiculous numbers about the number of farms that will be affected, and trying to keep this issue in the press. 

I suspect the government will win out, with no indication they will change course - as they shouldn’t.  

Bold enough?

My question: why weren’t Labour bolder? They are in an extraordinarily strong position, with years until the next election. They don’t need to be popular right now, they just need things to be better in five years time.

The last time Labour were in power, they were radical from the off. Within days, Brown announced that the Bank of England would be independent. Within a year, Blair had introduced the Human Rights Act, the first minimum wage and bold devolution.

Starmer is no Blair. He doesn’t communicate as well, but he also doesn’t seem to be quite so radical. He has the potential to be bold: he should be.