Growth and debt will come back to haunt Reeves

I have been covering budgets for a long time now – 40 years, in fact – but even I am not quite old enough to have heard Louis XIV’s finance minister Jean-Baptiste Colbert delivering his famous quote: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

If a pile of feathers and a lack of hissing is the measure by which Rachel Reeves is to be judged, I would suggest, at first sight, that she has succeeded with her second budget. Yet she has done little to suggest that soon, Britain will have more and fatter geese to pluck. In short, the chancellor did too little and was too short-termist.

It is good that Reeves didn’t need to raise taxes as much as feared, had more wiggle room to burnish her left wing credentials and was able to help a lot of people who the Tories have been squeezing very hard for a long time. But the fact is that a more confident, more radical, more far-seeing chancellor would have done far more.

As expected, freezing income tax thresholds was Reeves’s means of attack. The Tories argue that this stealth tax breaks her manifesto promise, but in truth it’s a tricky one for Kemi Badenoch, as her party did exactly the same thing when in power.

Badenoch’s typical overblown and nasty budget response was politically inept. Calling Reeves the worst chancellor in history while Kwasi Kwarteng was only sacked just over three years ago is ludicrous, even if he has been written out of Tory party history quicker than a victim of Stalin’s purges. Badenoch called for Reeves to resign, but since she does this every five minutes, it fell flat.

Suggested Reading

The Budget: Rachel Reeves’s missed opportunity

James Ball

The verdict of the Tory Party on this budget is irrelevant. It is what the markets do that counts. I would be far less worried about Badenoch’s sneers than about the fact that after all Reeves’s work, as David Aikman of the National Institute of Economic and Social Research points out, “Debt is expected to stay at around 100% of GDP for the foreseeable future – still in unsustainable territory.”

The chancellor knows that the last 17 years have brought a series of supposed once-in-a-lifetime shocks. The credit crunch, Brexit and Covid have been quickly followed by war in Ukraine and now Donald Trump’s tariffs.

Assuming that we are not going to have another doomy fiscal event soon is a triumph of hope over experience. The government’s borrowing is already high, and this budget increases it further in the short term. Another crisis and the bond market will be back to haunt us all.

It is therefore reasonable to argue that the chancellor should have gone further and taxed more. That might have removed the bond market from the equation, something to be devoutly wished for. But she also could have done far more to increase productivity and didn’t.

On the plus side, Reeves now has a safety net of £22 billion, to allow some leeway in case tax revenues or spending do not hit targets, and I think a lot of her revenue-raising plans made sense.

Electric vehicles are going to have to start paying for miles driven, not much but surely the start of a very long trend. There is also going to be a higher council tax charge on properties worth more than £2 million, plus new higher taxes on dividends, savings and rents. All will raise money from undertaxed parts of the economy.

Talking of which, introducing customs charges on ALL imports of parcels, no matter how small, is going to help local shops and put a spanner in the works of the online giants who have been dodging tax this way for years. Taxi apps are also going to pay more now a tax dodge they have been using to undercut licenced cabs is to be closed. Higher taxes on online betting are also surely a good thing.

The soft ride that online businesses have been enjoying has been long overdue for change to help maintain a level playing field. We should be seeing much more of this in coming years, not least as AI is going to destroy an awful lot of jobs.

The chancellor spent a lot of time talking about what she is doing for “ordinary people”. Frozen train fares, frozen fuel duty, lower energy charges taking £150 off average fuel bills, and a host of other measures. She has raised her standing with her party, and some of its traditional supporters, by abolishing the two-child benefits limit. A higher minimum wage will also be welcome on the government benches and will help the poorest paid.

All that is good, but whatever happened to Reeves being the growth chancellor? A real shocker from the Office for Budget Responsibility’s budget report – which appeared earlier than expected – was the lowering of growth forecasts because of lower productivity.

The new average growth rate, predicted to be just 1.5% is lamentable and continues a very worrying trend. This has to change. Higher growth is the key to almost everything, yet Reeves did virtually nothing to push for it.

Without more productivity and more growth, this government and any future successors will still have to find more money. As Colbert might have said, they will have to pluck the goose more and put up with a lot more hissing.

Reeves has staked its reputation on increasing productivity and last year introduced a whole raft of specific long-term measures including training, planning law, investment and tax breaks. But these are not working as well as hoped or as quickly as expected, and now was the time to do more.

That, not higher taxation or better benefits, was the real issue at the heart of this budget, and the fact that it was not really addressed at all suggests that while she may have escaped tar and feathers on budget day, Rachel Reeves’s goose may soon be cooked.