Ignore the manifesto, this is a budget from deep within Labour’s DNA. It raised taxes on ordinary people a lot, and spent money on better public services, including a stronger welfare system. Abolishing the “two-child limit” for benefits is the most cost-efficient way to take children out of poverty – and much more effective than last year’s expensive gimmicks, such as giving free school meals to richer children.
Just as the Tories will typically hold taxes down, and allow the NHS to become a bit worse, so Labour will make the opposite choice. The great thing about a democracy is that we, the people, get to choose, and what we expect to happen does happen, at least give or take.
Headroom of £22bn reassured the markets, with UK 10-year gilt yields falling 0.07%, a better performance on the day than the US, France or Germany. That is not much, but it shows markets don’t think Rachel Reeves’s commitment to her fiscal rules has disappeared, and they expect her to remain chancellor for some time. But for all that, the UK government is seen as less creditworthy than these three countries – even than France, which cannot pass a budget worthy of the name. We are paying 4.4% on 10-year debt – France pays 3.4%. The market’s trust in Reeves only goes so far.
The budget showed they are right to be cautious. First off, the tax rises are delayed. Petrol taxes will rise – but not just yet. Same for EV charges. Same for the freeze in the tax allowances. Same for the mansion tax. And so on. Indeed, I think that the budget made me better off in real terms next year: no rise in rail fares for my commute to work, and no new tax rises for me either.
That reluctance to inflict much actual pain opens up the possibility that the promised tax rises will get scaled back or abandoned if there is sufficient political opposition.
The same is true for spending cuts. We have already seen how cuts are vulnerable to backbench disquiet. The Treasury says that the Department for Education (DfE) will absorb the eye-watering rise in the bill for special educational needs – a bill created by disastrous changes brought in by the last Tory government, and not mirrored, for example, in Scotland. The DfE says otherwise.
I doubt Labour backbenchers are any more willing to see core school spending fall than they were to cut benefits for wealthy pensioners. Some of that £22bn headroom will end up softening, if not eliminating, these education cuts.
More generally, the spending review pencilled in extremely small rises in spending in pretty much all areas towards the end of the parliament. They imply next to no pay rises for teachers, doctors, nurses and so on, and probably longer waiting lists. Whatever else we may say of Reeves, she is no Javier Milei, Argentina’s chainsaw-waving president, and it is hard to see those spending plans being adhered to.
If she is lucky – and perhaps she will be, some day – then growth, as hard to predict as ever, will return, and the fiscal numbers will be good enough to meet her fiscal rules without a return to austerity at the end of the parliament.
But that is a gamble, and if it does not pay off, more tax rises will be coming in a couple of years.
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