Rachel Reeves sounded triumphant as she delivered Labour’s first Budget in 14 years. ‘Invest, invest, invest,’ the Chancellor said. She claimed hers was a Budget for growth and prosperity and, that most of all, it was a Budget to help working people. But the Office for Budget Responsibility – the body set up 14 years ago by George Osborne to judge fiscal events – doesn’t seem to agree. Its report, published immediately after the Chancellor delivered her Budget, makes for grim reading.
The stand-out chart in the OBR’s report shows the effect the increase in employer National Insurance contributions will have on Britain’s labour force. Reeves gets much of her £40 billion tax rises from increasing the amount employers will have to pay to employ staff. Put simply: it’s a tax on jobs.
The OBR report calls out the effect this will have on the workforce: ‘The increase in employer NICs announced in this Budget reduces the participation rate by 0.1 per cent.’ A tenth of a percentage point may seem small, but that means around 60,000 Britons out of the labour market and not in or looking for work.
Who will end up paying for the NICs hike? The OBR’s assumption is that, next year, companies will absorb 40 per cent of the costs by reducing their profits. But the other 60 per cent of the cost is passed on to ‘workers and consumers, via lower wages and higher prices’. And the following year, ‘76 per cent of the total cost is passed through lower real wages, leaving 24 per cent of the cost to affect profits’. So although Reeves says her Budget serves working people, the OBR say it’s those very same working people who will ultimately pay for it.
The OBR’s growth forecasts make for particularly grim reading too. They point to 1.5 per cent growth at the end of the decade – pretty thin gruel. What’s more, the OBR say Reeves’s measures will lead to higher interest rates and higher inflation.
Over the next few years, the extra government spending Reeves announced is predicted to juice the economy. And in 10 years’ time, extra investment is forecast to mean the economy will be larger than it would otherwise be. But at the time of the next election, today’s decisions will be negatively impacting the size of the economy, due to the employer NICs rise and higher government spending crowding out private spending.
The OBR says the extent of Reeves’s spending splurge is ‘unlikely to have been anticipated’ by markets and will drive up gilt yields and the base rate by a quarter of a percentage point – increasing the government’s cost of borrowing – and Britons’ mortgage rates.
Five year gilt yields have already jumped by half the amount the OBR anticipated:
House prices are predicted to rise too, which will be a surprise to Labour whose house building programme and planning reforms were designed to make homeownership a realistic prospect for the working Britons their Budget is aimed at. Instead prices only seem to be going in one direction: up and out of reach.
Disposable incomes are already 2 per cent higher than was expected in March, due to data revisions. But the OBR says that by the start of 2029 they will be 1¼ per cent lower than was expected six months ago – and ‘the bulk of this difference (around 85 per cent) is explained by policies announced in this Budget’. So much for Reeves’s commitment to improve living standards: her Budget is hurting them.
Watch more on SpectatorTV:
Comments