Labour’s budget will expand public spending and taxes significantly for a second straight year. It is a missed opportunity for more substantial reform. Many of the targeted measures – higher taxes on pensions, dividends and savings – disincentivise investment and run counter to the government’s long-term objective of raising productivity and growth. Instead of rationalising a welfare state that expanded substantially during a health emergency, it marginally expands it. At a very high level, a growing public sector footprint will draw resources away from the more productive private sector.
While the last two Budgets have delivered modest changes in net borrowing, they are built upon a sizeable increase in the government’s tax take. The tax increases in the last two budgets rank among the three largest since the OBR was introduced in 2010. Revenue relative to GDP will rise to around all-time highs of over 42 per cent in 2030, with the biggest single contributor being the freeze to income tax thresholds in later years.
Spending is also rising sharply, reflecting both higher costs from existing policies and new commitments. It is expected to remain 5 percentage points above pre-COVID levels five years from now. Spending overruns of the past two years raise serious doubts about the Government’s promise to slow spending in coming years. They reflect the uncomfortable reality that government programs, once introduced, are incredibly difficult to roll back.
Higher public sector net borrowing in the short term is expected to see debt-to-GDP rise relative to today, despite the Government meeting its fiscal rules. The final-year buffer has increased to £22 billion, providing some additional headroom.
New Budget policies on net deliver a small fiscal expansion over the near term and delay fiscal consolidation. Credibility in the fiscal rules would have been enhanced had more of the tightening been brought forward, especially given inflation is currently above target and the Bank of England can offset any effect on growth if required.
More ambitious supply-side reforms that boost productivity, improve flexibility and dynamism in an economy that has suffered sizeable supply shocks from Brexit and the Pandemic should be prioritised to balance the books in a sustainable way.
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