Mr Micawber's Budget

Something turned up so nothing much was done

I have written that for me the Budget would be a critical event - a last chance for Sir Keir Starmer’s government to show that it was serious. Given an improvement in the calibre of economic advisers in No 10 and No 11 Downing Street, there was a narrow hope of the government moving onto the front foot. In the way of the world I wasn’t actually expecting it to be so critical: Rachel Reeves, the Chancellor, would just do enough for me to keep giving her the benefit of the doubt. In the event she did nothing. The government is a hopeless as I feared, though I don’t want to personalise the blame on her, as is the current fashion.

For the last few years, with one disastrous exception, Chancellors have been content to play a silly game over five year forecasts with the independent Office for Budget Responsibility (OBR) to prove that there government are being fiscally responsible, while pushing the boundaries as far as possible. This silly game is not as pointless as it sometimes looks. The Chancellor who didn’t want to play, Kwasi Kwarteng in 2022, delivered a budget (that wasn’t officially a Budget) so disastrous that it has become a world-famous cautionary tale, costing both him and his prime minister, Liz Truss, their jobs. With the budget and current account deficits as they, and the level of debt too, the government needs to signal some kind of discipline to financial markets - and for all the farce, the process does seem to do that. But for the the current Chancellor, as for her predecessor, Jeremy Hunt, they are gaming so hard that any idea of genuine strategy is lost. Or else their strategy is that of Dickens’s Wilkins Micawber: “Something will turn up”.

The game for Mr Hunt and Ms Reeves has been to push the pain into the tail of the five year forecast (impossible spending cuts for Mr Hunt, tax rises for Ms Reeves), while taking the good news (National Insurance cuts and extra public spending respectively) in the first bit. The joyful bit is that this target is reset every year: tomorrow never comes. To be fair on Ms Reeves, she’s not been as transparently dishonest as Mr Hunt, whom I rate as the worst Chancellor (that’s lasted more the 12 months) that the country has had in my 50 years of following these things. The trouble is that this may be just because he was operating in the two years before a general election his party was expected to lose; in a year’s time Ms Reeves will be (nearly) in the same position. That’s not a happy thought. This was her last chance to put in place longer term reforms and see some benefit before the next election. Next year it will be all about gaming the election.

In last year’s Budget Ms Reeves cut things quite fine. She raised taxes a lot, in not a very economically efficient way, but raised spending more - and left a very narrow margin against her “ironclad” fiscal rules. She was clearly expecting something to turn up. It only takes a small tweak in the OBR’s forecasts to give the government a lot more headroom - or to create a crisis. I think both she and her boss thought that the mere fact that the previous, chaotic government had been ditched would give the economy a boost. But it didn’t, and it really looked as if Ms Reeve’s gamble had gone badly wrong. Two weeks ago the expression that political journalists were using was ‘rolling the pitch'‘, when she gave a special briefing where she said she would have to put income tax rates up, without actually saying it. This was going to be balanced by a reduction in employee National Insurance, so that taxes would stay roughly the same for working people - the effect would be felt by investors and pensioners. This is in fact is quite a sensible idea. Within days they U-turned. My first thought was that Ms Reeves’s boss, Sir Keir, had panicked. Maybe he did, but we have learned later that something turned up. The OBR had uplifted its revenue projections, greatly reducing the gap that needed to be closed to keep to within the letter of the ironclad rules.

Ms Reeves still needed to raise taxes. She wanted to restore some of the forecast headroom so cynically cut away by Mr Hunt, and she wanted to abolish the two-child benefit cap put in place by the Conservatives once they had ditched their Lib Dem coalition partners. Both are very sensible things to do. Restoring the headroom is a good signal of prudence for financial markets, and reduces the risks of unhelpful speculation about tax rises in the future. The two-child cap played on prejudices against large but less well-off families, and made little sense in public policy terms, especially amid shrinking birth rates. The main tax rise is being done by freezing tax thresholds for basic and higher rates, which allow inflation to do the job of increasing the overall level of the tax take - but do bring more people into the tax net. It has advantage of pushing the pain into the future. Other than that there was the usual mix of tax changes here and there to make up the numbers. This included extra council tax on more valuable properties, which is one way of getting a bit more money from the very rich, but will leave collateral damage on people who are less wealthy but own big houses - and who will get hammered by Stamp Duty if the try to sell up, or caught by all manner of taxes and regulations if they try to let out. It is no substitute for proper reform of property taxes. Another new tax was is to be on milage for electric vehicles. This can be presented as the first stage in a more coherent approach to raising funds for road maintenance.

Politically the Budget served the government’s short-term needs. Lifting the two-child limit is popular with backbenchers and party members. Ms Reeves said proudly that it was a “Labour Budget”; it is not clear how that is meant to appeal to the two-thirds of voters who voted against Labour last year, or the four-fifths who say the would now. But it’s a rallying point for an inward-looking party that has delusions of representing the whole nation. Doubtless she hopes that something will come up again, so that she can raise tax thresholds as the next election approaches, skewering Conservative attacks. The government could also try to defend the lifting of the two-child limit as the country needs to encourage larger families. This is a point made by Reform UK, and the Tories are in real danger of getting into a tangle here. However, in keeping with his focus on the dwindling band of Labour voters over anybody else, Sir Keir is still talking about alleviating child poverty. This is valid but fails to challenge the poisonous “tax rises on workers for benefits for the feckless” narrative.

Missing in action, of course, is any attempt to propose serious reforms to Britain’s tangled tax system to make the country more economically efficient. The country is facing steadily growing challenges from adverse demographics, an adverse trading environment, dysfunctional public services, and a greater level of military threat. There are a lot of things that could be done to confront these challenges, but instead the government drifts.

Ms Reeves and Sir Keir (and I think it is the latter who is mainly to blame) are simply hoping for something to turn up that will allow them to turn the tables on the opposition and win another five-year term. To do what, exactly? We deserve better than this.