The British budget combines large numbers and a narrow vision
Rachel Reeves, Britain’s chancellor of the exchequer, will never have a better moment to make bold changes than the budget she presented on October 30th. She had a mandate to fix public services, a huge parliamentary majority and four months to work out how to raise taxes and encourage growth. In the end, she offered an odd mix of eye-popping numbers and small-bore thinking. She has taken steps to fix Britain’s crumbling public services, chronic underinvestment and fairy-tale fiscal forecasts. But she has lost her best chance at reform.
The figures in the budget were certainly audacious. Ms Reeves announced an increase in the level of taxation worth £40bn ($52bn; just over 1% of GDP), mostly by raising employers’ national-insurance contributions as well as by making some smaller increases in taxes on inheritance and wealth. That, along with an increase in borrowing of roughly £30bn, will fund a £70bn rise in government spending. The state will swell to a size not seen outside an emergency or war.
Tax rises to fix the state and stabilise the public finances were always going to be necessary. And the chancellor did usefully break with the past on government investment. Britain has one of the lowest rates of public and private capital spending in the G7. About a third of the increase in government expenditure will go towards new infrastructure. Although some of this money may be wasted, that is a worthwhile gamble. Any route out of stagnation will require Britain to do something about its terrible investment record.
Much else about the budget was disappointing. An old quip says that Britain tries to combine low American taxes with a high-cost European welfare state. Labour has decided to have European levels of taxation and welfare spending but to keep the foibles and inefficiencies of the British tax system.
This incentivises self-employment over employment and penalises small businesses that grow. Ms Reeves has exacerbated these distortions, by raising the level of employers’ national-insurance contributions and exempting more small businesses from paying them. The claim that this meets Labour’s manifesto pledge not to raise taxes on “working people” is sophistry. The Office for Budget Responsibility (OBR), a fiscal watchdog, says that workers will end up paying anyway, through higher prices and lower wage growth. Raising income tax would have been more honest and more efficient.
Other than national insurance, the budget concentrated on the highest earners. Loopholes in inheritance tax for small businesses and owners of farmland were narrowed. The “carried interest” tax break for private equity was reduced. Some of these changes are defensible. But cumulatively they risk sending the wrong message to the footloose wealthy in return for only trifling extra revenue. European-size welfare states need to be funded with broad-based taxes.
Choices on spending, too, were lopsided in a British way. The National Health Service (NHS) received a two-year £22.6bn increase in its day-to-day funding; education, transport and defence saw smaller increases. But beyond these departments, funding will remain tight. The danger is that an unreformed NHS absorbs the extra money without doing much better, while the rest of Britain’s dreary public realm, from its failing prisons to its creaking social-care system, imposes a heavier burden by dragging people down.
Those who wish the government well in its mission to boost growth and repair the British state, this newspaper among them, must hope that the budget was a down payment on public-sector reform. But Ms Reeves did not inspire confidence. Whether failing to raise a levy on petrol or weaseling her way out of commitments not to raise taxes on working people, the chancellor ducked hard choices. Reforming the state is not for the timid: it requires taking on the unions and interest groups. The OBR does not think the budget will create the growth needed to pay for public services. And the government will not be able to impose further huge tax rises. What else is left? ■