This Budget won’t fix the growth black hole

Rachel Reeves is not daft. She and the new Labour government have been flying a kite for weeks, talking up the dire state of the country’s finances and implying that all manner of tax rises might have to follow as a result. The aim, we now know, was to deliver a Budget that while raising tax to almost unprecedented levels, looks quite mild in comparison to everyone’s worst nightmares.

Did Reeves get away with it? We must wait and see. More money – lots more, in fact – for the NHS is going to be popular. “Protecting your payslip” might be a bit of a ruse when it involves employer National Insurance hikes that will eventually be passed on. And this Budget’s big hole – that by the government’s own figures, it does little to improve growth – is not an immediate concern for most of us.

Reeves began in the only way she could. By blaming the negatives she would outline over the next 80 minutes on the Conservatives. Britain’s first woman chancellor was quick to bring up the Office for Budget Responsibility’s report into Jeremy Hunt and Rishi Sunak’s Spring budget, and what they had been told by the pair at the time. For all Hunt’s face-pulling during Reeves’s speech and Sunak’s faux outrage during his fundamentally dishonest response, what they tried to pull remains breathtaking stuff.

The OBR said that the Conservative government “did not provide the OBR with all the information needed and had they known… then their spring forecast would have been materially different”. Frankly, the Tories were cooking the books and that the black hole in the government’s finances is as a result £22 billion. It is that story that Reeves and Starmer will continue to tell over the next five years.

On top of filling that black hole, the first thing the chancellor said she had to do was to find the money to fund two major scandals, the Post Office scandal and the contaminated blood scandal – a shocking total of £13.6 billion. The Tories had promised to pay this but without finding any money to do so, a familiar refrain in the last few years.

No wonder Sunak sounded so furious when he responded to the Budget. Labour has kept its word on the three major taxes it said it would not increase but has found £40 billion to fill the hole it inherited from him. It has also massively increased investment, without (at the time of writing) spooking the markets in the manner of Liz Truss and Kwasi Kwarteng.

Reeves raised much of the money without directly hitting “working people”, but they will feel it in the end. The vast majority of the money she clawed back comes from employers’ National Insurance contributions. These are not a direct tax rise for workers but will hit them and firms eventually, as the cost will be passed on.

There were also increases in tobacco tax, VAT on private education, higher capital gains tax, and more closed loopholes including abolishing non-dom status.

Inheritance tax will increase by including pensions, businesses and farmland. The last will be deeply unpopular with farmers as agricultural land used to be excluded from IHT but won’t be any more. The NFU’s president Tom Bradshaw said this meant it “has been a disastrous budget for family farmers”.

But Paul Johnson, head of the Institute of Fiscal Studies thinks “Capping pension, business and agricultural relief for inheritance tax won’t be popular among those affected, but makes sense.” Excluding huge amounts of inherited wealth from a tax on inherited wealth was always daft, and Labour say 75% of farmers will be unaffected. The noisy likes of Jeremy Clarkson will still bang the drum, though.

Reeves’ direct tax hikes will hit quite a small percentage of the population; the money will be spent on many more people. Schools get more money and the NHS gets the lion’s share, industrial strategy, transport also do well.

However, lots of other departments are still going to be squeezed. Spending on the police and courts fails to keep pace with inflation after 2026 and as the OBR points out other areas are also under a lot of pressure including “tackling climate change, addressing rising economic inactivity, and increasing housebuilding”. It is also the case that the areas where spending is increased have a lot of money to spend in a short time and they have to do it wisely or it will be a wasted effort.

Rachel Reeves also had some sugar to sweeten the pill. The Tory policy of using inflation and wage rises to increase income tax by freezing tax allowances is to be maintained, but not extended. It will still hurt for a few years, but then Labour can blame their predecessors for that.

Beer duty was cut, making a pint 1p cheaper and once again motorists have won a freeze in fuel duty. That alone costs £3 billion next year and is frankly just a bribe which cowardly chancellors have been paying to petrolheads for years now. It didn’t shut Clarkson up.

Still, the chancellor got the thanks of industry for extending the generous tax breaks on their investment, which Stephen Phipson, CEO of Make UK claims should “help turbocharge investment”. Yet he’d also like to see “a long-term industrial strategy which looks ahead 20 years and involves a laser-like focus on innovation”.

Overall, this budget does increase the percentage of GDP that the government spends but it is still not huge by international standards. The chancellor, in short, could have raised more and spent more, especially on investment.

Defence is still underfunded and the country needs a permanent step change in investment. The increases in government investment announced today, are only enough to keep the percentage of GDP invested stable and reverse planned decreases. Many economists would have liked to see far more spent on infrastructure and a commitment to increase investment further for longer.

Another elephant in the room was Brexit. This got only one mention from Reeves, when she said of the Tories, “their Brexit deal harmed British businesses” and that was it. Not a word on how much damage, what it has cost, and how it might be reversed or even ameliorated, nothing.

That matters because growth is the killer for this budget and this country. The chancellor insists the budget was about investing and it is true this Budget should increase growth in the short term at least but of the structural reforms that are necessary to increase the long-term growth rate there was very little.

The OBR says the next five years will not see growth rise above 2% in any year. That is still pathetic by historical standards, and much more could have been done to improve it.

Higher investment, more training, much more of an industrial strategy and something, anything to reverse or dampen the terrible hit from Brexit, all would help.

Rachel Reeves seems to have balanced the books and found the money to undo at least some of the damage that austerity imposed on the UK, but there was not enough long-term ambition or reform in her first Budget. That has to improve.

Reeves has made a start but not done enough. The country’s long-term problems remain. Productivity and growth are still far too low. That they look to remain so leaves you with the feeling that despite all her cleverness, the chancellor has missed an opportunity.