Labour’s first budget in almost 15 years marks a radical departure with past constraints on investment spending. New rules allow long-term planning and introduce safeguards governing how the extra cash is spent. But what are the more immediate implications?
Will the budget kickstart growth?
The Office for Budget Responsibility (OBR), which provides the government with independent economic forecasts, said extra spending in the first two years would expand the economy a bit more than Jeremy Hunt’s March budget, but act as a modest drag on the former Conservative chancellor’s plans stretching to 2029.
The end result, according to the OBR, is no economic benefit from £70bn of extra annual spending. The Institute for Fiscal Studies (IFS) described the budget as a brave investment in the UK’s long-term future, because all the benefit would emerge after the next election.
That said, the OBR is only one arbiter of the government’s plans. In a lively post-budget debate, the left-leaning Institute for Public Policy Research (IPPR) thinktank said the OBR was wrong to judge that Labour’s investment spending would “crowd out” the private sector. Supported by many other economists, the IPPR said the outcome would be the opposite of a zero-sum game and private sector investment would be “crowded in”, lifting growth by more than the OBR expects.
Will extra spending boost public services?
The biggest problem faced by Rachel Reeves was not so much the discovery of a supposed £22bn hole in the finances left behind by Hunt – though the need to find extra cash for public sector workers and asylum seeker accommodation was a blow – but the huge underspends in education, health, local government and previously unprotected departments such as transport and culture.
Merely filling the gaps in current departmental budgets with the £35bn promised in the budget means it will be difficult to improve the level of service. If Labour prevents the catastrophe that was awaiting the country had the Conservatives remained in power, it will be doing well. However, a counterfactual is hard to prove.
A more positive view would argue that the two departments receiving the bulk of the money – health and education – have the most mature budgeting and cost control systems, giving them the best chance of showing an improvement by the next general election.
Is austerity over?
The Home Office and Department for Transport were big losers in the budget. As was Lisa Nandy’s culture department. Efficiency savings are supposed to conceal the effect of cuts, but it will feel like austerity to the civil servants working in these departments, who are supposed to overhaul the border service, manage the building of new railways and prevent museums from closing.
Welfare payments are fixed at painfully low levels and the two-child cap remains in place. The Joseph Rowntree Foundation said: “It’s deeply worrying that we haven’t seen changes to social security.” Its post-budget modelling found “poverty is set to rise for all family types except pensioners”.
Labour says various infrastructure projects are likely to get the green light next spring, and Angela Rayner’s cheap homes plan will get under way. But public libraries and swimming pools shut in the last decade are expected to stay closed.
Did Rachel Reeves have a Liz Truss moment?
The financial markets panicked when former prime minister Liz Truss launched a mini-budget loaded with unfunded tax cuts. Traders who buy government bonds have remained wary of the UK ever since.
Their eyes widened last week when the scale of Reeves’s budget emerged, alongside the verdict by the OBR that it would be mildly inflationary. The City view was that the budget would reduce the Bank of England’s appetite for cutting interest rates.
Twenty four hours after Reeves made her speech the market wobbled and the cost of government borrowing increased. It proved short-lived after several senior bankers, including the boss of HSBC, intervened to ease jitters, rumoured to be after prompting from Treasury officials. On Friday all was calm again as the attention of financial markets switched to the US and the presidential election.
Will the national insurance increase harm businesses and workers?
Care home providers, charities and GPs are among the employers to denounce the rise in the amount employers pay in national insurance. The percentage paid for each employee was raised to 15% and the threshold for when payments begin lowered from £9,100 to £5,000.
The OBR says 80% of the rise will be passed on to workers in lower wage increases and 20% in higher prices. So workers and consumers lose, while shareholders escape paying. The IFS said two-thirds would be passed on. The academic research is less clear.
One paper written by IFS staff examining previous changes to contributions showed employers absorbed almost all of the increase in the short term and were unable to off-load any of the extra cost to staff or consumers. How the extra charge is paid for can also vary by industry and usually plays out over a long period.
A fear among businesses that they face all the pain has spurred them to complain.
Will inheritance tax changes hurt the farming community?
Estimates vary, but about 30% to 35% of farms in the UK could be valued at more than £1m, which is a new threshold for charging inheritance tax at 20% – half the standard rate – on farm estates. It replaces a regime that excluded farms altogether, allowing the children of farmers to inherit tax-free.
As there are about 209,000 farm holdings in the UK, that means between 62,700 and 73,150 could be affected. However, the tax-free threshold is enhanced by a £325,00 property allowance and can be doubled if the farm owner is married, giving a threshold of £2.65m. Farms are often hugely indebted and carry large bank loans, offsetting the value of the land.
Only 462 inherited farms were valued above £1m in 2021-22, according to HM Revenue and Customs (HMRC). And Labour says it will be 500 at most next year, when the new rules apply.
