Despite already knowing it was not going to be pleasant, and the OBR giving us a preview (to soften the blow?) an hour before it was announced, it is difficult not to feel disappointed by this Budget. On any side of the political divide I cannot see many people jumping up and down with excitement. The question that keeps coming back to me is simple. What was the point? What exactly was Reeves trying to do here?
If you want to stop relying on the bond markets you could cut spending.
If you want to get re elected you could avoid hammering the only productive part of the economy.
If on the other hand you want to obliterate any sense of goodwill among the hardworking people you claim to care about, then well done. That part you have achieved.
This is the first problem. None of this happened by accident. Reeves made these choices because she is terrified of ‘doing a Truss’ and is even more terrified of being accused of being the ‘same old Labour’ or of attempting welfare reform again, so instead of taking any risks or attempting any reform, she chose the one path that guarantees short term market praise and long term stagnation – truly the worst of all worlds.
There is almost no growth in this Budget. Nothing on the supply side, no reform, no investment story, no plan to get more people into work, no route to a more productive economy. We are a low investment, low productivity, low participation country with rising welfare costs. Whatever productive base we do have is shrinking and has been for a long time. A serious, competent government would start with the structural weaknesses we already face, but what Reeves has done is stabilised a problem she, herself created by choosing an arbitrary fiscal rule, that ties her hands behind her back and then presented the result as competence.
Of course the markets reacted positively. They always do when the government taxes people more and spends less. The bond market does not care how much worse off households are, how miserable life is, it cares about fiscal stability and discipline. The Reuters article spells this out clearly.
“Reeves delivered a Budget that will take more tax from workers, people saving for a pension and from investors to give herself more room for meeting her borrowing targets.”
That is it. All they care about is getting their money back, but they cannot be blamed for this, it is their function, we are the cause of our predicament, not the bond markets.
What will happen now is that Reeves will stand up and tell us that she has brought the cost of borrowing down, so therefore her choices were right. This sounds impressive as long as you do not look too closely (this is a common theme in modern politics) but it does not mean anything for the real economy, it is once again, vibes. Gilt yields did not fall because she improved productivity, investment or growth. They fell because she took more money off the parts of the country that still generate value. That is not real stability.
Reeves has lowered the cost of government borrowing by raising the cost of living for everyone else. That is what threshold freezes, higher NI on pensions and cuts to take home pay do. These policies are not free. Interest rates are predicted to fall, but only because the Budget is contractionary, not because it made the economy more productive or healthier. A rate cut would be a sign of weakness, not success. Lower mortgage rates will help households, but they will not fix any of the underlying structural problems, beware when you are told this is progress. These are simple revenue grabs dressed up as a responsible plan. As I have said previously, this looks good on the Treasury’s spreadsheets, not the country’s.
She is stabilising the state’s finances by squeezing households in a low growth economy that already has record taxes, record inactivity and a shrinking productive base. That may please the markets, but it does not fix the underlying problem. And this is the heart of it. If you only treat the symptoms, the disease gets worse. Britain’s structural weaknesses do not improve when you make working households poorer.
It is also untrue that the tax burden will be carried by the wealthiest. This Guardian framing is dishonest. The OBR scores show that the majority of new revenue comes from middle earners, the productive part of society. Taxed more and penalised for saving for retirement. This is not affecting the wealthy. The only ‘wealth tax’ (on houses over £2m) raises £0.4 billion out of £26 billion. Reeves has balanced the books on the only group she felt safe taxing – for all the talk of how the billionaires are the problem it turns out that it’s managers and doctors who are the real villains.
And just to show how misleading the government’s messaging is, look at the claim that Reeves has created £21.7 billion of headroom - this sounds impressive, however:
Headroom is the amount of spare cash the Chancellor leaves herself and is the difference between planned tax income and spending in the final year of the OBR forecast.
Firstly, it is not real. It is a forecast and only applies in the final year of the forecast, which makes it useless for anything except signalling (more vibes). Secondly, you can wipe out £21.7 billion of headroom with
0.3 per cent productivity downgrade
0.25 to 0.5 per cent rise in gilt yields
A softening of wage growth
A rise in welfare caseloads.
All of which have happened.
And this is the absurdity. Reeves is congratulating herself for hitting a target that collapses under the slightest pressure.
This is something else that nobody mentions. In the last three years the OBR has downgraded its own forecast nine times. Nine downgrades in three years. Two forecasts every year. Three downgrades every year. This is the foundation on which headroom is built. It is almost meaningless. Even worse, now they are moving the OBR forecast to once a year “if you can’t see it, it can’t be happening”
One of the major headline measures, removing the two-child limit seems to be a moral step and it definitely helps children who already exist, and that is a good thing, but it does not fix the structural reasons those families are in poverty. Children raised in households without work, without skills, or without stability are much more likely to become adults who struggle in the same way, not through fault of their own but because disadvantage repeats itself unless you change the environment around it. I am not reducing anyone to economics here. It is not good for the individual or for society to pretend that income support alone changes long term life chances.
We need a productive society, and in my view removing the two-child cap creates the opposite incentive. More dependency, not more contribution. More cost, not more capacity. Poverty needs to be relieved in the present, but long-term outcomes need to be improved as well. The Budget does one and ignores the other.
Everything comes back to the same point. We need a productive economy and a productive society. There is no other way. More people working. More people invested in the country they live in. More people contributing. A government that prioritises looking responsible to bond markets over fixing the real economy has its priorities the wrong way round. Nothing in this Budget moves us toward a more productive future. It simply makes the present more expensive for the people who are already carrying the country.
Disclaimer:
The views expressed in this essay are entirely my own. They do not represent the opinions or positions of any organisation or project I’m associated with.
This piece reflects personal interpretation and commentary based on publicly available data and reporting from sources such as the ONS, IMF, and the House of Commons Library. While every effort has been made to ensure accuracy at the time of writing, this should not be taken as financial or investment advice.