After a needlessly long run-up, Budget day is finally here. Investors, bond traders and house builders are breathing a collective sigh of relief – not because of what the Chancellor will say at around 12.40 p.m., but because the speculating, pitch-rolling and U-turning is finally over.
Under the rules of engagement between the Treasury and the Office for Budget Responsibility (OBR), the fiscal watchdog must be given ten weeks to produce forecasts. After dithering over when to trigger the process, Reeves decided to give them 12. I’d argue that decision has proved close to catastrophic. Her hope that good news might materialise in the meantime has, in fairness, partly paid off: gilt yields have improved slightly and wage growth projections have strengthened. This is what precipitated the chaotic scenes the other week when the Treasury – which we are still told never leaks – briefed the Financial Times that it no longer needed to hike tax rates. In a mark of how shambolic the comms strategy had been, the next morning – to stop markets freaking out – HMT then had to brief Bloomberg the reason for the U-turn was an improvement in the productivity figures and therefore estimates of the fiscal blackhole.
Whatever Reeves says, taxes on workers are going up, and the spirit of Labour’s manifesto pledge will be broken
But the side effects of this strategy have been like pouring treacle into the cogs of Britain’s economy. Weeks of kite-flying on property taxes, for example, have led – according to Rightmove – to one in five potential movers putting plans on hold. The London market has effectively seized up. Retail sales in the run-up to the Budget fell faster than expected, while business and consumer confidence has slumped. It’s not inconceivable that the pre-Budget period has measurably hampered growth. As former Bank of England chief economist Andy Haldane put it recently, GDP growth has been harmed ‘without any shadow of a doubt’.
With the speculation finally at an end though, what then will the Chancellor unveil in her Budget? Her focus, we’re told, will be on tackling the cost of living. The wheeze of continuing the fuel duty freeze but telling the OBR it will eventually be hiked will very likely be hard again. Minimum wage will be increased by 4.1 per cent in a fight against low-paid work while at least some green levies will be junked in an attempt to reduce household bills. The two-child benefit cap will be scrapped – at a cost of £3 billion a year – in a move that will do more to appease Labour backbenchers than actually improve the more accurate poverty metrics. The triple lock will keep hold of its sacred status and benefit claimants aren’t going to experience any real-terms cuts either.
Income tax thresholds (fiscal drag) will almost certainly remain frozen for another two years, raising £8 billion and dragging thousands more into tax. Salary-sacrifice schemes will be capped, limiting pension saving without triggering tax, and cycle-to-work loans will be reduced significantly. Council tax banding will be used to deliver a form of ‘mansion tax’ on homes valued over £2 million. Gambling will face new levies too.
The big question, though, is how far she goes on tax – and how voters react. Whatever she says, taxes on workers are going up, and the spirit of Labour’s manifesto pledge will be broken. The cynical calculation in avoiding an explicit rise in the basic rate is that threshold freezes are less visible to voters; the Treasury has seen polling which suggests this works. But a tax rise is a tax rise, however it’s packaged up. And if Reeves increases the burden by over £32 billion (in 2029–30 terms), she will become the biggest tax-raising chancellor in history.
When Reeves speaks – and when we see the OBR’s numbers – I’ll be looking for one figure and two themes.
The most important number will be the headroom Reeves leaves herself against her ‘ironclad’ fiscal rules. Part of the reason the months leading up to this Budget have been so chaotic is because of the wafer thin margin for error she left herself at her first budget and then spring statement. Moves in the gilt market, productivity downgrades, the U-turns on winter fuel and welfare cuts quickly eroded the £9.9 billion she had left herself with then.
And as I first reported, if Reeves manages to create a larger buffer, markets could respond favourably through lower gilt yields, which in turn cut borrowing costs and improve her next round of headroom. Oxford Economics estimate that a half-percentage-point drop in gilt yields could cut up to £5 billion from debt-servicing costs by 2029–30. My understanding is she’ll aim for at least £15 billion today.
Then there’s the main economic theme: inflation. Tax rises should be deflationary, as households have less to spend. But Reeves’s smorgasbord of small tax increases – we may see a dozen today – could have the opposite effect. The Bank of England and the ONS have already said her £25 billion raid on employer national insurance pushed up food inflation as supermarkets struggled with wage costs. Today’s minimum-wage rise will add pressure too. We’ve already lost more than 100,000 payrolled jobs since Reeves’s first Budget; the measures coming today risk worsening the underlying imbalance in Britain’s labour market. We have one of the world’s highest minimum wages paired with weak productivity – a combination that can't go on. Anything she does that leads to even higher labour costs simply will be inflationary. So I’ll be watching for the OBR’s judgement on the likely impact on prices and employment.
The second theme is political. Rachel Reeves has been on something of a journey over the last decade. As I wrote in last week’s magazine it was Reeves as shadow work and pensions secretary who declared: ‘we are not the party of people on benefits… We’re not the party to represent those who are out of work.’ But that Rachel now seems long gone. Serious welfare reform seems to be out of the window and so too could any talk of proper fiscal conservatism. Some of that journey has been a choice, some of it – say the scrapping of the two-child cap – seems to have been forced on her by Labour MPs. So I’ll be listening for clues in her delivery: will she abandon ‘securonomics’? Will she tack further left?
The other thing that none of us can ignore today, let alone the Chancellor is how the markets react. Even the New Statesman are now so – rightly – worried about this that they put ‘bond vigilanties’ on the cover of their magazine last week. The danger for Reeves – and frankly each and every one of us – is that, when pitchrolling becomes reality, gilt traders view her plans as unserious, unsustainable, insubstantial or a combination of the three. If that happens, and yields spike, we enter relatively uncharted territory at speed.
Whatever is or isn’t announced today though, however the OBR have counted our beans the fundamental crack in Britain’s foundations will remain. Reeves will close the gap a little today, but there will remain a gulf between what our state spends and the revenue it raises. Our aging population, inability to take anything away from OAPs and ever-worsening worklessness crisis mean that problem is only going to get worse. Fiscal fiddling today may delay the reckoning, but it won’t prevent the debate we must eventually all have about what we kind of state we want and how we intend to pay for it.
The Spectator will have full coverage of the Budget and its aftermath: a live blog on Coffee House, key numbers in Lunchtime Espresso immediately after the speech, a rapid-reaction episode of Reality Check with Tim Shipman and James Heale, and our post-Budget briefing live streamed from 7 p.m. this evening. Stay tuned.
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