A VERY Labour Budget - now the political debate begins! (1 November 2024)

Well, that was big! The October 2024 Budget may, in years to come, be spoken of as the first true day of Keir Starmer’s Labour Government. Forget synthetic rows about free Taylor Swift tickets. A clear ideological divide has been created as Labour’s Chancellor, Rachel Reeves, announced spending plans of almost £70bn a year over the next five years. Reeves admitted to ideological differences with the Conservatives in her Budget speech, saying at the end: “If the Party opposite disagrees with the choices that I have made, then they must answer, what choices would they make?” Her choices on tax would protect working people, her plans to fund public services supported schools and hospitals, and her investment rule would drive growth across the country, she argued. This is a government that believes in the role of the active state.

Slightly under half of the money raised for investment, £36bn per year, will come from tax rises. £25.7bn of additional taxes will come from an increase in employers’ National Insurance Contributions (NICs), and the rest from a mix fiscal measures, including on Capital Gains Tax and Non-Doms. Alongside tax increases, borrowing will rise by an average of £32bn over the next five years. 

Reeves has allowed herself this extra borrowing by changing the way in which debt is measured. Some will argue that this is fiddling the figures, but it is surely true that investment is both a cost and an asset. Sometimes a much delayed asset. Spending on a child’s education today is simply a cost to the economy, but in ten years time, when that educated child enters the workforce, she or he is suddenly an asset. And an important one. 

There were, however, two main risks to the Chancellor’s bold Budget. The first was negative market reaction, with investors spooked by large borrowing in the same way that they ran scared from Liz Truss’s mini-budget of 2022. That was never likely to happen this time, although there has been some uptick in the cost of borrowing in 36 hours since the Budget. The Government will be keeping an eye on this, although Rachel Reeves received a boost the day after the Budget when, in an unusual move, the International Monetary Fund, gave her changes to the debt rule their seal of approval. 

The second risk is a more serious one: the fear is that bosses will pass on the employer NICs increase in lower wages or by hiring fewer workers. The independent Office for Budget Responsibility (OBR) believes this to be realistic. In fact, whilst the OBR forecasts a spike in economic growth - the Government’s overriding mission - next year, boosting GDP by 0.6 per cent in 2025-26, this is due to flatten over the forecast period, which runs for five years. One of the reasons for this, according to the OBR, is employer reaction to the NICs rise. 

Rachel Reeves has highlighted that over the longer term, the OBR forecasts an increase in growth. That makes sense, as shown in the hypothetical example of our educated child above. Furthermore, many of us, including me, have criticised politicians for short-term decision making in the past, so we should welcome a longer term approach. And the alternative would have been to reverse the cut in employee NICs from Jeremy Hunt’s Budget in the Spring, 100% of which would have been paid by employees. Reeves’ choice was the better one.  

There is a problem with Reeves’ response about long-termism, however. The OBR forecasts modest growth over 50 years. Yes, you read that correctly. That’s very long term and, as John Maynard Keynes famously said, ‘In the long term, we are all dead’. This indicates, and Labour has said as much, that this is a first Budget and there is only so much that can be done in one year. I think we can expect more growth boosting measures in fiscal events to come, building on yesterday’s start. Whether those measures include further tax changes remains to be seen. 

So was this a good Budget? It certainly gave an important boost to the NHS, which gets an annual real teams income increase of 4.0 per cent from 2023-4 to 2025-6, tied to reform. Education was another big winner, enjoying real terms growth of 3.5 per cent over those years and, hidden in the small print, local government received a 10.2 per cent boost to its finances. I know from my work in local economic development in recent years that many local authorities are on their knees and this extra cash will be very welcome. 

In my own subject area, that of industrial policy, there was a £2bn boost over five years for the automotive sector, a £975m increase for aerospace, also over five years, and up to £520m for a new Life Sciences Innovate Manufacturing Fund.  These are three examples of early support for the priority sectors identified in Labour’s Green Paper on Industrial Strategy. The UK’s participation in Horizon Europe, which was put at risk by Brexit, is funded, meaning that UK researchers and businesses can continue to participate in the world’s largest programme of research cooperation.

If there was a disappointment in the Budget, for me, it was that more was not done to tax wealth. The real unfairness in the UK’s tax system is that we tax work too much and unearned wealth not enough. To this extent, I sympathise with employer concerns about the NICs rise. I think employers can pay some of it - I’m old enough to remember employer criticisms of the National Minimum Wage, arguing that this would cost thousands of jobs, job losses that never occured - but I think inheritance tax and Capital Gains Tax, taxes on assets, would have been better ways to raise revenue to invest. I hope these taxes are addressed in Budgets to come. 

This is probably wishful thinking, but I’d also like us to have a more grown up conversation about tax. For some decades, it has been politically impossible for any party to go into an election promising to raise income tax. The smart view is that whilst voters tell pollsters that they would be happy to pay more tax for better public services, in the privacy of the polling booth, they vote with their wallets. This left Rachel Reeves no option but to go into the election arguing that she would not raise tax on “working people” - income tax, employee NICS or VAT - leaving her little room for manoeuvre if she needed - as she did - to raise money to invest in the public realm. We say we want honesty from our politicians, but this needs to be matched by honesty from ourselves. We can’t have Scandinavian levels of public services with US levels of taxes. If we wish to have our taxes cut (I don’t, but some do), that’s fine, but let’s not complain about hospital waiting lists or crumbling schools if that is the choice we make. 

One final point. Before yesterday’s Budget, the UK’s first Hindu Prime Minister, still the Leader of the Opposition as I write, asked his last Prime Minister’s Question in that latter role. PMQs was followed by the UK’s first female Chancellor presenting her initial Budget. We still have a long way to go on equality and diversity, and we can argue that this has taken too long, but it’s still worth reflecting on how far we have come. Bravo!