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Chancellor Rachel Reeves promised she would deliver a “Labour Budget” and in key traditional respects it lived up to its billing: £26bn of tax rises partly to pay for more welfare spending.
Reeves fought the last general election with a promise of minimal tax rises. She has now increased taxes by £40bn and £26bn in successive Budgets, taking the total burden to 38 per cent of GDP by 2030, an all-time high.
The government is set to spend £16bn a year more by the end of the decade on welfare than was expected only six months ago, according to the OBR — the result of policy U-turns, higher than forecast inflation and “an increase in disability caseloads”.
The Budget therefore opens up a stark dividing line in British politics, with Labour vulnerable to attacks from the Tories and Nigel Farage’s Reform UK for being the high tax, high welfare party.
Claiming that working people were paying higher taxes to fund a bloated benefits bill, Conservative leader Kemi Badenoch on Wednesday called for the chancellor to resign.
But for the short-term at least, Reeves’ package seemed to have reassured many MPs in her fractious party, particularly the extra taxes on owners of homes worth more than £2mn, on landlords and dividends.
Given that the Budget was conceived in political chaos, with Downing Street aides briefing that Labour MPs were plotting a coup against prime minister Sir Keir Starmer, that will count as something of a win for Reeves.
However the tax burden falls on all sections of society — including those Reeves calls “working people” — thanks to an extended freeze on income tax thresholds, raising over £8bn in what is expected to be an election year in 2029-30.
The chancellor insisted this did not break a Labour election pledge not to increase taxes on working people, a claim met with guffaws from the opposition benches.
Coupled with Reeves’ attack on pension contributions made through salary sacrifice schemes — a policy that impacts employers and employees — it is easy to see how the Budget will come under attack in the coming months.
But Reeves’ Budget also contains the more subtle elements of a longer term political strategy which she hopes will lay the foundations for a second Labour election win towards the end of the decade.
Some £10bn of the extra taxes raised by Reeves will be channelled into the unglamorous task of rebuilding her “headroom” against her fiscal rules, which state that she must balance day to day spending with tax receipts by the end of the forecast period.
This piece of apparently prudent housekeeping has two purposes, which may only become more obvious when the immediate Budget noise subsides.
Firstly to reassure the bond markets that she is serious about maintaining fiscal discipline, with the aim of bringing down government borrowing costs which currently run at about £100bn a year.
If she can cut the debt interest bill, which accounts for about one in eight pounds of public spending, Reeves hopes that more money will be available to improve services.
Then there is the second purpose of building up a “buffer” against the fiscal rules, a safety margin that can be transformed into a war chest for pre-election tax cuts.
Reeves went into the Budget promising City figures that she wanted it to be the last big tax-raising event of this parliament, and that in future the air of chaos and crisis that attended this one will be banished.
Many ministers wished she had done this all a year ago, while she still had some political capital in the bank and before Labour had slumped below 20 points in the opinion polls.
Despite Reeves’ claim this week that she would be around to deliver the Budget “next year and the year after next”, much will depend on whether she really has secured the public finances this time.
The chancellor’s record in this regard is not encouraging. It was exactly a year ago this week that Reeves told business leaders at the CBI’s annual conference: “We’ve put our public finances back on a firm footing.”
“Public services now need to live within their means because I’m really clear, I’m not coming back with more borrowing or more taxes.”