A Halloween Budget that was as much trick as treat

The first Labour Budget for 14 years, and the first ever from a female chancellor of the Exchequer, was impressive in its presentation. Rachel Reeves, with zero previous ministerial experience, gave every impression of someone in complete command of her brief. In taking over the Treasury at such a difficult moment, and with such self-confidence, Ms Reeves is to be congratulated for smashing through one of the more reinforced of politics’ glass ceilings. Her sober, pragmatic style is well suited to the times.

That said, Ms Reeves’s Budget is something of a gamble. Never before has a chancellor ramped up taxation by so much in peacetime, with commensurate increases in public spending and borrowing. By the end of this parliament, according to the Office for Budget Responsibility (OBR), the state will account for fully 44 per cent of the British national income, taking £38 in every £100 generated by the economy, and adding £180bn to the national debt over that same period.

With the best will in the world, that is a significant expansion of the public sector – and carries no necessary guarantees that it will yield the kind of improvements in economic growth, public services and living standards that all would wish to see. Indeed, the OBR cautions that there is only about an even-money chance that the government’s more flexible fiscal rules will be met, even with £40bn a year of extra taxation.

The danger, both economic and political, is that Ms Reeves will have to return to the Commons near Halloween in a few years’ time with another “horror story” and terrify hard-pressed taxpayers once again. A penny off the price of a pint in the pub is the least we would need to help us drown our sorrows.

In the short to medium run, the substantial increases in funding for the NHS, schools and housing should bring some results, and a feeling of progress being made. In her Budget statement, the chancellor actually doubled down on previous pledges and declared that “we can now begin to bring waiting lists down more quickly, and move towards our target for waiting times to be no longer than 18 weeks, by delivering our manifesto commitment for 40,000 extra hospital appointments a week”. She will be held to those words.

Parents and pupils will also see their crumbling schools repaired, and Angela Rayner will have £5bn to help her ameliorate the housing crisis – and she needs it. The paradoxical concern here is that the health service will find it hard to spend a sudden cash infusion after more than a decade of what Lord Darzi, in his recent report, called an unprecedented period of NHS austerity. Such problems arose when there was a similar jump in resources in the early 2000s, when national insurance was also increased to improve patient care.

It is fair to say that whichever party had won the last election would have faced the challenges Ms Reeves has had to bear. As now seems clear, both main parties indulged in a conspiracy of silence about the true state of the public finances, and the fantastically unrealistic public spending plans set out by Rishi Sunak and Jeremy Hunt. Neither party admitted that “working people” would have to pay more if they wanted the kind of public services they expect and were, tacitly, promised.

The British general election of 2024 was, so to speak, the last gasp of cakeism. The increase in employers’ national insurance contributions may or may not be consistent with the letter of the Labour manifesto, or the spirit of the reassuring noises made by Labour politicians; but there is no doubt there was some sort of reckoning coming, and someone would have to pay up.

So the risks with taxation and borrowing Ms Reeves is taking have to be acknowledged. The longer-term impact on business and enterprise of a £25bn “tax on jobs” is not obviously conducive to private sector investment and economic growth. Companies will also have to contend with a sizeable rise in the minimum wage, laudable in itself, and the extra costs entailed by the Employment Rights Bill. Employers, especially in smaller enterprises, will find it more costly and difficult to retain and hire labour or invest in their futures.

Disappointingly, Ms Reeves’s Budget is accompanied by an OBR forecast that indicates it will tend to push inflation rates and interest rates higher than they would otherwise be. Growth will continue to be relatively modest, and the improvement in household incomes for the rest of the 2020s similarly muted.

If the public does experience a tangible improvement in its services, then the “gamble” may well pay off for Ms Reeves, in economic and political terms. If not, and the voters find the tax burden so intolerable that they contemplate a more radical approach to the size of the public sector, then Ms Reeves’s gamble will have failed, and she will have run out of excuses.

Perhaps she and her colleagues should have made the uncomfortable point that, were it not for Brexit, then none of this would have been necessary. That, in 2016, was the original national gamble. All Ms Reeves is doing is chasing the losses.