Britain’s budget risks being a huge missed opportunity

MANY politicians would kill to be in Rachel Reeves’s position. For her first budget on October 30th, Britain’s chancellor has the benefit of an unassailably large majority in Parliament, a leaderless opposition and almost five years before the next election—enough time for even slow-burn policies to start winning over voters. If there were ever a moment to reshape how tax and spending work in Britain in support of the government’s self-professed aim of igniting growth, this is it.

True, Ms Reeves has some firefighting to do: she needs to find £20bn-30bn ($26bn-39bn, or 0.7-1.1% of GDP) a year just to stop Britain’s feeble public services from crumbling further, and ideally a slug more than that to start investing in them. But that should not be impossible for a state that already takes in over £800bn in tax annually; Ms Reeves’s French counterparts are having to raise vastly more to resolve their own fiscal crunch. Increasing broad-based taxes like income tax or VAT, a consumption tax, would quickly balance the books without hurting growth much.

An ambitious budget wouldn’t stop there. Britain’s tax code is a mess, the result of decades’ worth of fudges, special-interest carve-outs and misguided tax raids. A brave pro-growth government would use its political capital to take a scythe to it. One place to start would be stamp duty, a transaction tax that jams up the property market, misallocating Britain’s already inadequate housing supply. Stamp duty on shares distorts the financial system. The exemptions to VAT deter small businesses from growing and skew spending. Taxes are much higher for employees than the self-employed, even though companies are typically more productive.

A reforming budget would also unleash investment. Britain has been bottom of the G7 rankings for public and private investment for 24 of the past 30 years; it desperately needs better transport and power infrastructure. A radical budget would unlock more public cash, but also take further aim at the bureaucratic bottlenecks that hold development back. Put together a plan to tackle all this, and the mood music around the new government would quickly gain tempo.

To her credit, Ms Reeves has been clear about the importance of investment: expectations are high that she will change Britain’s fiscal rules so that she can borrow more in order to invest. Tweaks such as excluding the Bank of England’s quantitative-easing losses from the definition of debt used in the fiscal rules could allow another £10bn-20bn of borrowing for investment. (Going much further—by, for example, moving to a measure that would include the state’s assets, not just its liabilities—would risk spooking markets.)

But in other respects, the signs are uninspiring. Instead of signalling a once-in-a-generation tax reform, Ms Reeves has trailed a slapdash effort, cobbling together revenue-raisers while trying to wriggle free of self-imposed political constraints. Labour’s unwise pre-election pledge not to increase corporation tax, or to raise taxes on “working people”—which it defined in its manifesto as income tax, national insurance and VAT—has left precious little room for ambitious reform.

To get itself out of this fix, the government appears to be readying itself to increase employers’ national-insurance payments. That is at least a broad-based tax which can raise decent revenue. The Resolution Foundation, a think-tank, reckons that requiring employers to pay national insurance on pension contributions could raise £9bn annually. But however much Labour might protest to the contrary, in economic terms this would patently be a tax rise on working people, because employers would just pass the costs on to employees’ pay packets. Reversing the pre-election cuts to national insurance of four percentage points by Jeremy Hunt, Ms Reeves’s predecessor, would be simpler and raise over £20bn.

To fill up the rest of the hole, Ms Reeves looks likely to borrow more, and to raid here and there. There is a case for changing the tax base for capital-gains tax (CGT); and a number of exemptions to inheritance tax and CGT could do with a chop. But such tidying up will raise only a few billion pounds if Ms Reeves is sensible. Going too far would create growth-destroying incentives for taxpayers to change behaviour—by, for example, holding on to assets in the hope that a future government will reduce CGT again—and would also jar with Sir Keir Starmer’s warm words about wealth creation. Some measures, such as a further clampdown on non-domiciled taxpayers, are reportedly being diluted.

A budget of this sort would be the hallmark of an unambitious government scrambling to make the figures add up, not a radical one doing whatever was needed to pursue growth. Nor would it make sense politically. The choice facing Labour is between frittering away its political capital on weaselly definitions and unpopular half-measures like cuts to the pensioners’ winter-fuel allowance, or deliberately spending it on lasting improvements to the public finances. Be bold, chancellor. ■

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