Budget Shenanigans

The Chancellor, Rachel Reeves's November budget, has been mired in controversy.  She had made the mistake in the previous year of being unwilling to streamline and simplify our clunky and not very progressive tax regime, which enabled tax evasion and lucrative business for tax accountants. Her pledge before the election to not increase income tax, national insurance, and VAT was naive and will probably turn out to be a harbinger of her downfall. These represent 75% of the total tax intake of the country, and by refusing to increase, or just as importantly, reform any of them, she had effectively made it impossible to deliver on some of the improvements to public services. The benefits for children and support for fuel payments for the elderly and disabled were perceived as givens by the new Labour Government. 

The consequence was that there had to be several U-turns made in order to deal with cost-of-living issues. Keir Starmer, the Prime Minister, had backed her in all of these changes. The popularity of both Keir Starmer and Rachel Reeves, already low, had plummeted to the lowest ever. They were intertwined as the architects of what was now perceived as a failing Labour government. The Conservatives had made no impression following the last election; they had been effectively dismissed by the electorate as having failed over 14 years and having no right to be forgiven any time soon. The consequence has been that the Reform Party under Nigel Farage has become the most popular party, gaining 30% of the vote in numerous opinion polls. Farage, despite widespread corruption and resignations within his party and shocking rumours about his racism and bullying of his peers at school, was nevertheless being bigged up by the media as the next Prime Minister.

In her first budget, Rachel Reeves had followed her instincts and the advice on the tax changes that were needed. She seemed to be a prisoner of the Treasury, which was reluctant to address some of the fundamental issues about the taxation system within the UK. This was not likely to change despite powerful arguments from the IFS and Resolution Foundation for a more root-and-branch recalibration of the tax system. 

When Torrsten Bell, the former director of the Resolution Foundation, became a minister within the government with responsibility for pensions and an advisor to the chancellor, I had some hope that Reeves would adopt a more progressive and holistic approach to taxation. Bell had detailed knowledge of the benefit system and had clear ideas for a fundamental re-shaping of the UK taxation system. It would take the form of moving towards an integration of income tax, national insurance and capital gains tax with a simplification of VAT. Together, they would reduce the scope for tax evasion and significantly minimise the bureaucracy for businesses. These radical changes, along with proposals for tackling the housing crisis, were set out in his book, Great Britain. How We Get Our Future Back.

It was a surprise when, in the early autumn, Rachel Reeves gave several speeches which suggested that she may be thinking of abandoning her pledge not to raise taxes and to combine income tax with national insurance as a means of safeguarding working people. It would draw in additional funding from those not paying national insurance: the retired and those living on their assets under the present system. These proposals were widely debated, but following considerable opposition from the Labour Party and an OBR-estimated increase in the tax take, they were eventually dropped in her budget on the 26th of November. Instead, we had what has been called a smorgasbord of smaller tax increases for gambling, large houses, and various other devices that brought in sufficient funding to increase the headroom and to tackle some of the pledges that the Labour Party had made in the manifesto. It played to the Labour MPs and to the bond markets, who had been anxious for Reeves to keep to the treasury rules and increase the headroom.

Her performance at the budget was about as good as it would get; her turgid presentations are not particularly inspiring. She was proficient but unlikely to win many accolades. She was absolutely crucified by the response from Kemi Badenoch, leader of the conservative opposition, who made very few comments on the technicalities of the budget but focused instead on a personal assassination of the chancellor. It was carried out with a brutal and cruel flourish that confirmed that Badenoch is totally unsuitable to be in any position of power.

The response from the markets was generally positive, and any worries about the bond markets dipping were unfounded; even the pound rallied.  There was also widespread support from many of the groups, who had been upset by the first budget, which had done little to support children in poverty and disabled people. There were also some new measures, such as introducing a mileage rate for electric cars, reducing the cost of energy, and providing income for families with over two children, which were well-received.

The next morning, we had the usual criticism from the right-wing press reflecting some of the heinous comments that have been made by Kemi Badenoch. There was also a bullying interview with the Chancellor by Nick Robinson on the BBC Today programme. He went out of his way to be extremely harsh on the chancellor. She kept her cool during this exchange, and later in the programme, David Blunkett gave a balanced justification of the budget, acknowledging that it could have been more radical, but providing the sort of gravitas that is sadly missing in much of the political debate today.

The presumption by the media in its avalanche of articles, podcasts and programmes is that Starmer and Reeves are on their last warning. I am not sure. I do not believe that Reeves has either the grasp or the imagination to provide the radical reshaping of taxation that is needed. Starmer has given her a lot of trust and support, but has shown in the past that he can be decisive when he sees the writing on the wall. With Darren Jones as Chief Secretary to the PM and Torsten Bell in the Treasury team, he is getting alternative advice and may well decide to jettison Reeves to safeguard his own position, which has been bolstered by his relationship on the world stage and with EU leaders in particular.