Some budgets are important but quickly forgotten. Some budgets are trivial but linger long in the memory. The package of measures Rachel Reeves has delivered is a rarity: a budget that matters and will go down in the history books. And perhaps not for the right reasons.
Make no mistake, the buildup was shambolic, and real damage has been caused by the leaks and counter-leaks coming out of the Treasury. The early release by the Office for Budget Responsibility of the contents of what the chancellor had in store was a final, chaotic twist marring what was supposed to be Reeves’s big day.
Despite the embarrassment of having pundits dissect her measures before she had actually announced them, the chancellor put in a combative performance, defending her policy choices and attacking the Conservatives for their record in office between 2010 and 2024. In this, she was helped no end by the still vivid memories of the Liz Truss mini-budget of three years ago. For Labour, Truss is the gift that keeps on giving.
Expectations were so low ahead of the budget that it didn’t take much to exceed them. Things may yet unravel quickly, but the signs are that the package provides the chancellor – and the government – with a bit of much-needed breathing space.
That’s because, after all the dire predictions of gaping black holes in the public finances, the OBR’s forecasts were not nearly as bad as the City pundits had expected. There was never any need to consider the heavily trailed 2p rise in the basic rate of income tax. Through a hodgepodge of other measures, Reeves has more than doubled the size of the buffer against any unexpected bad economic news to £22bn.
But a breathing space is one thing; a sustained improvement in Labour’s political fortunes is quite another. The chancellor had best be hoping that her second budget is received better than her first, because the future of the government hangs on how well it goes down with two audiences: the financial markets and voters. Keeping both onside is going to prove a difficult – and perhaps impossible – task.
The markets liked the fact that Reeves was increasing the size of her rainy-day fund to £22bn by the end of the decade, but were much less keen on the live now, pay later shape of the budget. Spending is increasing in the short term, but the higher taxes will only start to kick in as the date of the next election approaches, when the government will be looking to keep voters sweet. The markets are already starting to wonder how serious the commitment to financial rectitude actually is. Neil Wilson, an analyst at Saxo markets, summed up City scepticism when he commented: “Big spending increases front-loaded, massive tax increases and restraint has been back-loaded – the classic policy mix: jam today, pain tomorrow. I hardly think it seems credible.”
But nor for that matter would be front-loading tax increases at a time when unemployment is rising and growth is stagnant. That would simply increase the real risk of the economy getting stuck in a doom loop of depressed activity leading to weaker public finances and hence pressure for still higher taxes or public spending cuts. There was already a Groundhog Day feel to Reeves’s second budget, and she will want to avoid another tax-raising package next year at all costs.
Instead, she is banking on cuts to energy bills, the freezing of rail fares and the increase in the minimum wage to buy her a little time. It is possible, for example, that the reduction in inflation next year from lower energy bills will speed up the pace at which the Bank of England cuts interest rates.
There are two problems with this approach. First, the giveaways are much more modest than the eventual tax increases, and the tax increases will hit even low-paid workers. Someone on the minimum wage working full-time will be paying an extra £137 a year by 2030 due to the extended freeze on tax thresholds.
The second problem is that there is no guarantee that the Bank of England will accelerate cuts in interest rates, or that the financial markets will continue to have faith in the chancellor. Reeves and her fellow ministers talk a good game about how the government is turbo-charging growth, but there is precious little to show for it. Growth would indeed solve all sorts of problems. It would raise tax receipts, reduce the deficit and obviate the need for tough choices. Yet the budget contained no new supply-side measures that might boost the UK’s growth potential.
For Reeves, the hope is that her package will do for Keir Starmer what Geoffrey Howe’s 1981 budget is supposed to have done for Margaret Thatcher: mark a turning point in the government’s fortunes. Then, too, the government was hugely unpopular. Then, too, the chancellor froze tax allowances. Little more than two years later, Thatcher won a second term in office by a landslide.
Howe was in the happy position, in the days before Bank of England independence, of being able to announce a two percentage-point cut in interest rates on the day after his budget. That option is not available to Reeves. Nor is there likely to be a repeat of the Falklands war – arguably a bigger factor in Thatcher’s re-election than Howe’s budget.
So Reeves can only sit tight and hope that something turns up. There is no guarantee that it will.
Larry Elliott is a Guardian columnist
