On Wednesday afternoon in the Commons Rachel Reeves laid out the details of the first Labour budget in 14 years. She began by stating that “This is a changed Labour Party.” She also promised to end the ‘short-termism’ of the previous government and to ‘invest, invest, invest’. Perhaps that last point could more accurately be described as ‘spend, spend, spend’ after hearing the full speech. Reeves announced the budget would raise total tax revenues by £40 billion, this brings us to the highest tax burden on record, worse still it will rise in every year until 2027-28 at least. Ever the optimists, we usually start these blogs with the good bits. That proved impossible.
The Bad
Taxes on Jobs
The most damaging of the tax hikes will undoubtedly be the increase in employers' national insurance, rising from 13.8 per cent to 15 per cent. Additionally, the threshold at which employers pay the tax will decrease, going from the previous rate of £9,100 to just £5,000. The Chancellor has said that these changes will raise £25 billion per year, money that will come from businesses and in turn from the customers and employees of those businesses… meaning working people, which Reeves has herself now admitted. Estimates say that the rise will cost businesses an additional £900 per employee. A £25 billion reduction in business earnings will mean less money available for employing new staff, less money available for wage increases and less money available for other investment - all of which will harm growth. The latest HM Treasury report on the impacts of tax rises states that its forecast on revenues from raising employers NI are not accounted for.
Taxes on wealth
Stamp duty on second time buyers has been increased to 5 per cent. While this may seem like a tax on the wealthy, most second home owners buy their property to rent it out, this extra cost then will be passed on to renters, the vast majority of whom are working people. Most of these renters are also trying to save money to buy their own house, something that will be made more difficult with increased rent payments. A continuation of the exemption on many first time buyers should be welcomed, but this is a tax that should be scrapped altogether
Capital gains tax is also being raised. The lower rate is jumping from 10 per cent to 18 per cent and the higher rate will go from 20 per cent to 24 per cent. Many of those with investments in the stock market are hoping to use their returns to retire on, this has just been made much more expensive.
In what must be two of the most pointlessly harmful policies of the budget in terms of pain vs revenues, VAT has been introduced on private schools and agricultural relief on inheritance reduced.
Sin taxes
Increases in the taxes of tobacco products will ring alarm bells for smokers with a headline 10 per cent rise above inflation on hand-rolling tobacco and a 2 per cent above inflation rise on tobacco generally. As previous TPA research has found, smokers typically pay for themselves three times over, with tobacco taxes already raising around £9 billion. The most confusing of the tobacco taxes is a new £2.20 per 10 millilitres tax on vaping liquid. This is particularly bizarre as the NHS has encouraged smokers to replace their habit with vaping, the easiest way to do this is make the price difference between the two as extreme as possible. Shockingly, an impact assessment has estimated that 29 per cent of vapers will switch to other products, including tobacco. The Chancellor also announced a rise in the soft drink industry levy, known as sugar tax. Taxes on non-draught alcoholic drinks will be raised in line with RPI. The nanny state seems stronger than ever.
Spending
The largest increase in spending will be the £22.6 billion in the day-to-day budget for the NHS for this year and next. A further £3.3 billion increase in the NHS’ capital budget and £1 billion for the restoration and repair of NHS buildings means that well over half of the £40 billion tax rises will be spent on healthcare alone. Other massive spending increases will be seen with an additional £2.3 billion for the core schools fund, £5 billion for new housing and a 19.9 per cent increase in the Department for Education’s budget.
The Good
Thresholds to rise
Thresholds were frozen in the Conservative budget of 2022, over time as inflation raised wages, more and more people were lifted into paying higher rates of tax despite not earning more in real terms in a process known as fiscal drag. But while Reeves said she would unfreeze thresholds , the change will not take effect until after 2028-29, which is almost certainly after the next election, meaning the commitment sounds hollow.
Freezes on fuel duty
Labour have announced a continuation of the freeze on fuel duty, something that has been a fixture of every budget since 2011. The UK has one of the highest fuel duty rates in Europe and preventing this from rising further will be welcome news to many motorists.
One pence off the pint
The budget also announced a ‘1p off the pint’ cut to draught drinks with a 1.7 per cent cut, maybe the hope is that cheaper pints will aid in dampening the blows of other announcements in the budget. As welcome as a cut in draught duties will be for pubs across the country, it is massively outweighed by the increased cost of employer NI and boost to minimum wage.
The ugly
The OBR assessment
Taking centre stage in this budget was the Office of Budget Responsibility (OBR). The OBR is responsible for forecasting the impacts of the budget on the economy and it gained significant interest following Liz Truss’ mini-budget for which they were not consulted. Their post budget report, Economic and Fiscal Outlook, evaluates the effects of the £70 billion increase in spending. It finds that the cost of the state will be 44 per cent of GDP, 5 points higher than the pre-pandemic levels. The OBR states that, “Budget policies temporarily boost output in the near term, but leave GDP largely unchanged in five years.” This directly contradicts the pro-growth messaging of the government. The report finds that the rate at which the deficit is reduced will also slow, relative to the previous government. This will likely mean that the cost of servicing debt will rise from the £102 billion per year it is currently at with debt rising in each of the next five years.
More taxes, more borrowing and more spending. So much for that changed Labour Party…