Rachel Reeves has at least one more big outing before her debut budget on October 30.
Next week the Chancellor is due to travel – barring last minute Cabinet hiccups – to the G7 and International Monetary Fund (IMF) gatherings in Washington.
The IMF’s support for a tough budget already has emerged from preliminary fiscal documents issued in the last week, which for some reason linked together the two biggest English speaking nations, Britain and the US, as needing to take remedial action to chip away at borrowing and debt burdens.
The Americans have a much bigger debt problem than Britain but it is much less of a worry for US authorities because of the extreme privilege of issuing the world’s most important reserve currency. That means there is an insatiable appetite among surplus nations, notably Japan and China, to hold US Treasuries which can speedily be turned into cash to meet emergencies.
Reeves and the Government have done a skilful if totally inappropriate job of preparing the ground for a tough budget.
Rising: Almost every possible revenue-raising measure has been telegraphed
Almost every possible revenue-raising measure has been telegraphed, including some which breach manifesto pledges. VAT on public school fees is a levy which breaks through the ring fence around exemptions. The Economist magazine notes it is the first such breach in the exemptions, which the Institute of Fiscal Studies (IFS) estimates are worth up to £100billion.
The proposed surcharge on employers’ National Insurance Contributions (NICs), or on employers’ pension payments, is a crude way of circumventing the promise to leave levies on working people untouched. The reality is that it is a horrific cost for services businesses, which represent more than 75 per cent of the economy and are very labour intensive.
It will hit working people hard through job losses and higher consumer bills if businesses decide to pass on the cost. What is missing from much of the advance budget rhetoric is any recognition that the country is already overtaxed as a consequence of Covid-19 and Ukraine.
It was anger from Labour in opposition at the hit to households energy bills from Russia’s invasion of Ukraine that led the Tories to go the Full Monty on subsidies.
Former Office for Budget Responsibility chief Robert Chote observed during Commons hearings on the pandemic that in wartime conditions, such as Covid-19, running up debt and borrowing is acceptable. After the Second World War it took decades to eliminate the debt legacy but it didn’t stop governments from inaugurating the NHS or building record numbers of new homes.
We are, after all, taxed enough. The IFS notes that at 37 per cent of national income, tax revenues are at the highest level since the 1940s and still rising. Baked-in-the-cake revenue increases from the freezing of tax allowances will deliver £35.7billion by to 2028-29 alone, before any new tariffs are imposed.
Reeves is seeking to frame her proposed tax assault on drivers, strivers, gamblers, employers and better-off Britons as no different from what Tory chancellors have done in the past. Her team has been quoted as saying the 2024 budget is in the same mould as Norman Lamont and Ken Clarke after Britain’s ejection from the Exchange Rate Mechanism (precursor of the euro) in 1993 and George Osborne following great financial crisis in 2008.
The reality is that Reeves’ predecessor Jeremy Hunt put in place the scaffolding for paying down pandemic and Ukraine debt when in 2022 he lifted the headline rate of corporation tax back to 25 per cent from Osborne’s 19pc and extended the freeze on income, IHT and National Insurance thresholds until 2028-29. He also began the arduous process of seeking to peg back the welfare budget, with sickness benefits among those swelling the size of government.
Reeves is plugging black holes she has helped to create with generous public sector pay deals and money aimed at strengthening government services. Her budget will see the revival of some key investment projects notably the Euston link for HS2 and plans to better connect London and Birmingham to Manchester.
The flaw in her message is that piling tax increases on a recovering economy would crowd-out rather than crowd-in private investment. It will place entrepreneurship, enterprise and growth in jeopardy.
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