Labour's Austerity Budget

Sickly rabbits and at least one hedgehog

‘The era of rabbits is over’ declared one source close to Rachel Reeves, making the Chancellor sound like a particularly blood thirsty and vindictive farmer moments before she delivered her first Budget. As we will see in this post, there are still a few rabbits limping around the Treasury building.

There was a lot of hype surrounding the Budget which is understandable given that it was Labour’s first Budget in over 14 years and the first one delivered by a woman. As such, I got why my Labour supporting friends were excited about it. I had pretty low expectations given that most of what had been trailed over the past few weeks looked pretty bad but I had hoped for a few nice rabbits. I wasn’t really expecting to benefit personally as I’m not in receipt of any benefits, don’t have children, and don’t use the NHS. I’m also not super rich (although I do own shares) so most changes to the tax and benefits systems are unlikely to have a major impact on me. I do however have three nieces in school, parents who have recently needed to use the NHS, and I also obviously care about improving the lives of poor people and economic growth. I’m also weirdly interested in fiscal policy so the Budget still does matter to me.

So, based on this pretty vague set of criteria, how would I rate the Budget?

At some point I would like to write a long post on how I’d go about reforming education as it is something which interests me although I am certainly no expert. It would probably look something like implementing a voucher system (as an aside something I wrote on this years ago is kind of how I ended up working for Truss), paying some teachers a lot more and others quite a bit less, firing most teaching assistants (other than those working with children with Special Educational Needs), and generally increasing the education budget. 

As such, it was good to see extra money being spent on education - especially on SEND. It was also encouraging to see more money being spent on repairing school buildings. No child should have to try and learn in a school that is falling to pieces so this is welcome.

The NHS got more money. Of course it did. We are constantly told that the NHS is being underfunded which is a complete nonsense. We spend around the OECD average on healthcare and there is a legitimate argument to be had that we should spend more - but it is not right to say that it has been starved of funding and deliberately being run into the ground. I am hopeful that the requirement to improve productivity will actually be realised so that the extra money will improve patient outcomes.

However, on both the NHS and education I am disappointed that the dire need for reform in both of these areas has not been recognised. The NHS does perform poorly compared to other countries in the areas which matter such as survival rates for cancer. A new government with a massive majority has the opportunity to bring in sweeping reforms. I’ve written before why only Labour can get away with implementing the reforms needed to fix the NHS but there seems to be no sign from the Treasury that it is pushing for this.

Transport was OK. I was pleased to see that the government has committed to funding the electrification of the TransPennine route which will do a better job at connecting places such as my home town of Huddersfield to major cities such as Leeds and Manchester. I know that nobody really cares about ‘Levelling Up’ these days but this is how you help towns such as Huddersfield and the people who live there, not placing a Treasury outpost there.

Unfortunately the plan to dual the A1 connecting England and Scotland has been scrapped. This has been dragging on for over a decade due to our dreadful planning system. This means that people travelling between England and Scotland will continue to face long journeys which will have a negative impact on productivity.

On the topic of transport, investment in this area looks set to fall. This matters because when it comes to public investment, not all investments are equally beneficial for the economy. The multiplier effects stemming from transport investment tend to be higher than for other areas and so you get more bang for your buck. As such, if we’re going to increase public investment then it should be spent on transport and this doesn’t look likely to be the case.

The most troubling aspect of the Budget was the changes to the tax system. There has been a massive increase to Employers’ National Insurance Contributions. While it is technically true that this does not constitute a tax increase on ‘working people’ as the legal incidence falls on firms and not employees, in reality it is a tax increase on working people. This is because the economic incidence falls on workers in the form of lower wages and fewer job opportunities with the lowest skilled being most adversely affected. This is a breach of Labour’s Manifesto and it’s bad for businesses, bad for workers, and bad for growth.

As expected, the Chancellor also hiked Capital Gains Tax. Thankfully it wasn’t quite as bad as had been trailed, but increasing CGT is still a bad move. I wrote yesterday on why the Chancellor should resist the temptation to increase CGT and so it’s disappointing to see that she went ahead and made this damaging increase.

Stamp Duty has been increased on people buying second homes. Stamp Duty is the worst tax on the books and while it is difficult to muster too much sympathy for the very wealthy and for landlords, it will further gum up the country’s already dysfunctional housing market and so it will be people looking to rent who will be hardest hit, as per usual. 

As with the NHS, a new government with a huge majority has the political capital to be bold on tax reform. The government failed to do this. It should have been bold by scrapping Stamp Duty entirely, implementing a Land Value Tax, and removing all VAT exemptions. Reforming the tax system could have reduced the burden on working people and helped to boost economic growth. The Budget was therefore a missed opportunity from Labour.

It was also disappointing to see almost no policies to help the very poorest households in the country. During the Summer I wrote that we need to take poverty seriously and yet neither the Conservatives or Labour were even mentioning it. Rachel Reeves spoke for 77 minutes yesterday and yet only found time to say the word ‘poverty’ once.

There were a few positive announcements when it comes to tackling poverty. For example, the earnings limit for Carers Allowance has been raised and the debt deduction cap for people on Universal Credit has been lowered. There has also been a commitment to building new social homes (we should be building homes of all kinds to tackle the cost of living crisis).

However, it is nowhere near enough to really deal with poverty. The government has kept the housing benefit freeze for private renters. It has also committed to following through on plans to make the criteria around claiming benefits more restrictive. Most disappointing of all is the fact that it has not scrapped the deeply cruel two child limit for households on Universal Credit meaning that many parents and their children will remain trapped in poverty.

The government might respond to this by pointing to an increase to the National Living Wage. I don’t want to be a doom monger on this. When the National Minimum Wage was first introduced by the last Labour government many on the centre-right argued that this would lead to mass unemployment (which obviously didn’t happen). We’ve seen that minimum wages can be introduced and increased without having a detrimental impact on employment opportunities or prices. I will write something on this (I last wrote about it back in 2018) but we do need to remember that it will be a significant increase to the National Living Wage all while Employers’ NICs are being hiked and changes to workers’ rights are being introduced. It is impossible to say where the breaking point is, but I am nervous that all these changes could have a negative impact on jobs for the most vulnerable households.

At the beginning of the post I alluded to the fact that there were some rabbits in the Budget. The first rabbit is actually a hedgehog. Fuel Duty has, once again, been frozen and so has not increased in line with inflation. I say it is a hedgehog because of the nice chart which the OBR is forced to create every two years where it pretends that the Chancellor really will increase Fuel Duty in line with inflation. There is no good reason why motorists should be subsidised by the rest of us in this way. The government should have been bold and committed to increasing it in line with inflation but with the ambition of eventually scrapping it (and other taxes on motorists) and introducing road pricing.

The second rabbit was around Beer Duty. Reeves has cut Draught Duty by 1.7 per cent which is the equivalent of a penny off the price of a pint in a pub. This will have no real impact on the hospitality industry which is still struggling or on most household finances but I guess it’s better than nothing.

The final rabbit is more significant. Reeves has announced that she will eventually unfreeze income tax thresholds and so effectively end fiscal drag. I wrote last week on why this is the right thing to do.

The Budget saw a few giveaways and there has been some increase in public investment and this is largely being funded through massive tax increases. However, economic growth is forecast to continue to be depressingly low. This is hardly surprising. I wrote the other week that tax increases are a form of austerity. In fact, they are the most damaging form of austerity and they do not bring about economic growth. As such, it will be ordinary working people and entrepreneurs who suffer the most under these painful tax hikes and all with no economic growth or any guarantee that public services will improve.

Rachel Reeves managed to avoid spooking the financial markets too much and any spike in gilt yields was always unlikely. However, this is mainly because she didn’t repeat the mistakes of Truss and Kwarteng as many of the measures were trailed beforehand and she did not sideline the OBR.

So, there we have it. The Budget isn’t a catastrophe but it is incredibly disappointing and looks set to have a damaging impact on the economy. It was encouraging to see Reeves mention long-term growth (which is a refreshing change from many of her predecessors) but it is a big gamble. The new government has shirked the chance to make radical reforms and instead has decided to inflict a lot of pain which will be felt by low-paid workers and small businesses with no guarantee of improved public services and virtually no prospect of economic growth or improving living standards anytime soon.

Thanks as ever for reading. Happy Halloween!