Few Budgets will have had quite the build-up as Rachel Reeves’ first outing with the famous red box. After a generation out of power, the spectre of the October 30th Budget loomed large over the government, if not the whole country, all summer.
Despite the last few weeks being dominated by endless speculation, briefing and leaks on what would be in the Autumn Budget, the sheer scale of it still had the capacity to surprise.
Be in no doubt, this is change. Tax and spend are back and back in a big way.
Reeves has bet big that her tax rises will be enough to turn around the UK’s failing public services, and that her changes to fiscal rules to unlock additional capital investment will give a stagnant economy the shot in the arm it desperately needs.
The stakes are high, and how successful this turns out to be will determine the fate of Keir Starmer’s premiership.
Market Response
Given the scale of the tax rises – aimed squarely at business and at the wealthy – combined with a substantial increase in borrowing, the Chancellor will have been forgiven for being a little nervous about how the markets would react.
In a large part, they didn’t… Movement across UK gilts was nothing extraordinary, the FTSE 100 closed down, but the more domestic focused FTSE 250 ended the day up.
Starmer’s first mission is to restore economic stability – and an adverse response to the new government’s first fiscal event could have blown that out the water.
That there was none will have been a substantial relief to the residents of number 10 and 11 Downing Street.
Subdued Growth Forecasts
What will have been less welcome news for the Government though was the official forecasts from the OBR predicting that growth will remain subdued across this parliament – despite the fiscal stimulus applied by the Chancellor.
Compared to the last forecasts in March, growth, in the short term is up slightly but in the last years of the period, which will include the next General Election, they revised their figures down.
Of greater concern to Labour’s chances of re-election is the OBR’s view on real-wage growth, which they say will average 0.5% over the cycle, but like the economy in general, flatter in later years.
Forecasts are forecasts, and may bear little resemblance to what pans out, but if people don’t feel the benefit of a Labour government in five years’ time, they won’t vote for another one.
Public spending
The big winner out of the Budget was Britain’s beleaguered public services. The sense that everything in the public realm was getting worse after 14 years of Tory government was a major factor in Labour’s landslide.
Reeves described the public services that Labour has inherited as being ‘on their knees’ and you’d be hard pressed to find someone who would argue with that characterisation.
Fixing that was at the heart of the Budget and despite the briefing wars and letters from various Secretaries of State, including the Deputy PM, to Keir Starmer, most departments have seen substantial additional funding. Most notably the £22 billion more that will go to the NHS in England.
To pay for this, taxes are rising to the highest they have ever been as a share of GDP.
The big question though is; will it be enough? Reeves set out the parameters for her forthcoming spending review with overall spending projected to rise by 1.5% annually in real terms.
When you take into account that the NHS will of course see a higher proportion of that increase, other departments will still feel the squeeze. In a climate where they will need to find money for pay increases, and make 2% annual efficiency savings, budget settlements will not feel particularly generous.
A hint of populism
After a bruising summer, where it felt that the Government’s political operation was missing in action ultimately leading to the demise of Starmer’s Chief of Staff Sue Gray, the Chancellor made two announcements that showed a surprising populist touch.
A 1p cut to the price of a pint in the pub felt like something out of a Budget from the last century. It got a loud cheer from the back benches, but with the average pint in the UK costing nearly a fiver (and well north of that in central London or Edinburgh) it is hard to argue that it was £85 million well spent.
The other surprise given the heavy hints that Fuel Duty would rise, was Reeves’ decision to extend the freeze and ‘temporary’ 5p cut for another year. Effectively though that makes it almost certain that it will remain frozen for the duration of the parliament, undermining Labour’s environmental credentials and risking losing more votes – and maybe more seats – to the Green Party.
A significant moment
The first budget of a new government is always a significant moment. The tone and direction, they will hope, has now been set for the next five years.
Labour will hope that it can put the arguments around freebies and the calamitous decision to scrap the Winter Fuel Allowance for all but the poorest pensioners behind them.
They have certainly set out their stall – but given their collapsing poll ratings since the general election, perhaps the biggest question they should be asking is are the public still willing to give us a hearing? On that, only time will tell.
