My post on Reeves's budgets (Not such a bad hand but played poorly, 2 Jan) made the bold and foolhardy promise to outline what I would have done in her position as chancellor. Here goes.
- the absolute first priority should have been an increase defence spending in the budget year. Labour has said they will increase defence spending to 3.5% of gdp by 2035, which is not before the parliament after the parliament after this one. Does anybody think that Putin did anything other than smirk when briefed on the UK budget? This really should have been the first priority because i) it's necessary and ii) Reeves could have used this as a smokescreen for having to raise taxes: she could have claimed that the Ukraine situation and concomitant outlook clearly demands it. Of course Ukraine isn't new and Labour knew about it last year but I think she could have spun an argument that previous budgets, mainly those of the Conservatives, had been based on an assessment of the security situation that was now clearly optimistic. There's no need to spend a lot more immediately but planning should be taking place to increase our conventional defence forces, build up supplies of munitions, missiles and drones, ensure the nuclear submarine fleet is fully operational (apparently it's availablity is poor, though that is nothing new in my limited experience) and improve resilience to the many Russian hybrid war threats. A sensible plan would entail ramping up spending over this parliament, starting now. There is no higher priority. Some spending on resilience in other areas e.g. cyber security of infrastructure, could reasonably have been branded as "defence" in this scenario
- scrap stamp duty on shares. The government has consistently said it wants growth, while taking many steps that kill it. It says it wants a successful stock market in London and wants more of us to invest more of our savings there. But it charges stamp duty on shares bought in Britain: £3.2bn was taken from investors trading on the London exchange last year. It's a small amount on each trade, surely no-one really notices? But they do as they wouldn't have had to pay if the deals had been done in America, Germany or Japan. So, because there was also a threat of new dividend taxes, £7.3 bn was withdrawn from British funds and shares during the four months to the end of October. Reeves responded to the declining number of London share flotations by introducing a three year stamp duty holiday for new IPOs (Initial Public Offerings on the market) but I don't expect that to help much. There is a danger that one of the unique advantages Britain has - being in between the American and Far East market time zones and so able to deal with both in a normal day - is being wasted. The London Stock Exchange is on a long term downward glide path in terms of number of companies quoted and the amount of liquidity available. Stamp duty on shares is a bad tax and it should have been scrapped.
- cut costs. This isn't easy when we can all see the potholes in the road and the "planned overloading" that occurs in the NHS every winter. (I say planned because the concern about NHS capacity in the mid winter has been annually recurring for a long time) but it is absolutely necessary. Tougher targets for spending departments are needed backed up by an expenditure ceiling whih, surprisingly, we don't have. David Smith points out that, while Reeves's fiscal rules are as good as any used by recent chancellors, Denmark, Sweden and Finland have expenditure ceilings their governments are expected to live within and, as a result, lower debt relative to GDP than the UK. He says Spain, Austria and "even Italy" have used expenditure rules to better control public spending and get a grip on debt. I must admit that's what I thought "cash limits" were meant to do, as introduced by Labour in the 1970s but it seems we aren't tight enough on actual, rather than planned, spend. Unless we do get tighter controlthings will continue to slide. Reeves's plans - which get tougher as the parliament progresses, what her back benchers will say when we get there is pretty obvious - would still only have us stabilising debt at 96% of gdp at the end of the decade. That would leave us with a debt to gdp ratio around twice the average for advanced economies and we'll still be devoting more of national income to paying debt interest than at almost any time in post war history
- The toughest target should probably be for the benefits system which is clearly being exploited when we read that 50,000 people a day are being approved for sickness benefit (it was 2,000 under the Tories). We seem to have lost the plot entirely on what constitutes a significant disability, or at least one that merits PIP. A new version of the universal credit benefit reforms introduced by the coalition government based on concepts from the Centre for Social Justice think tank is urgently needed. As chancellor I'd set targets for future spend rather than picking up whatever tab lands. We can't go on like this.
I accept taxes had to rise this time, though I worry that they are at historically high levels in total. I do think Reeves should also have cut some taxes even if they had to go up in total. A fundamental overhaul is needed. Here's my plan:
- refresh and rationalise income tax by completely overhauling the thresholds and, if necessary, rates to remove the ridiculous marginal rates at specific points, in particular in the £100,000 to £125,000 range where marginal rates can be over 60%. This isn't for personal benefit: my income is very modest compared with that! You may think people who earn that much can afford it but this is exactly the sort of income a hospital consultant could earn. We want these people working harder but hit them with silly taxes on their income when many also got hit by punitive taxes on their pensions, some just by working too many extra hours. That specific issue got fixed but without fixing the general problem. I'm convinced if tax was genuinely progressive up the income scale, with no marginal cliff edges, productivity in the economy would improve and our brain drain of talent, including doctors, would be less severe. The tax system is hitting HENRYs (High Earning Not Rich Yet) not the really rich. It seems to be aimed with a laser beam at people with aspiration. David Smith wrote in October that the £100k-£125k cliff edge would be too expensive to fix but by the next month he just said it needed doing. I agree - it's doing a lot of damage
- look harder at taxing the very rich in ways they can't easily avoid, like income tax. A banker on £2 million a year wasn't affected by the higher rate tax threshold freeze being extended; a consultant on £125,000 was. Tax expert Dan Neidle says "the UK's experiment with almost-progressive taxation has run its course. The actually rich have been insulated enough. Time to choose". At the same time the scrapping of the non-dom arrangements is yet another u turn Reeves needs to make. We want these people to stay and pay tax on their UK earnings, not leave because we try to tax their earnings or wealth elsewhere.
- Rethink council tax. Reeves added a tax band (we already had one extra band in Wales) but the bands stop at £5 million so a £100 million house pays the same as a £5 million house. The increase didn't tax the very rich - it taxed the people who happen to live near the very rich, like those who happen to own a £2m family home in London
Pensions are a mess. Osborne in particular started a trend for tinkering which has made the whole system a dysfunctional nightmare.
- Clearly the triple lock should be abolished. The freezing of personal allowances together with the triple lock increases in the old age pension meant that before long people in receipt of only the modest old age pension would be paying tax on it. As those folk aren't in PAYE and most of them wouldn't be familiar with self assessment it wasn't surprising that Reeves said those people wouldn't have to pay tax on their state pension. This is sensible as the amount collected from people on a very low income would be small and not worth the hassle. However the principle is terrible as it now means that people with even tiny private pensions (who therefore have a tax code) will have to pay tax on their state pension. It offends even basic principles of justice that some pay tax on their state pension and others don't. Good chancellors avoid creating too many losers and therefore too much dissent by clever balancing of giving and taking away. This particular tax problem could have been averted by giving people over state pension age a personal allowance equal to the standard state pension in return for abolishing the triple lock and returning to a just link between the state pension and average earnings. That is the only fair link as it is equitable for the old and the young.
- Stop victimising private pensions. The government say they want people to save into pensions but then steadily do things to deter it, budget after budget, this time by tightening the rules on salary sacrifice. Meanwhile public sector pay bargaining should take full account of pay packages allowing for pensions which are, after all, just deferred income. A review of how the enormous public sector pension liability can be met in future is desperately overdue.
The government needs to look properly at a huge range of supply side issues which are holding the economy back.
- One obvious area is the need for investment to genuinely fix key areas of public sector dysfunctionality, especially NHS resourcing. Rishi Sunak claims that the NHS had never had a plan to increase healthcare training places to meet rising demand until 2023. The result is that it either has to hire foreign staff or pay huge fees for agency workers to fill gaps. The Conservatives introduced a long-term workforce plan to ensure we trained enough doctors and nurses but he says the current government has abandoned it. Why would it do that? Matt Goodwin says there is a reason why Britain rejects thousands of its own talented, ambitious young people from becoming doctors every year, while simultaneously importing doctors from the poorest, most medically deprived countries on earth. While doing it they claim that the NHS would collapse without immigration. But this year nearly 26,000 young Brits applied to study medicine. 8,126 state-funded places were available. The numbers on the previous two years were almost identical. The system is designed to need immigrants. Over 40% of NHS doctors were trained overseas and we now import more doctors annually than we train. "WTF?" one might ask. I suspect the answer is simple. Providing extra training places costs money now and Reeves keeps finding black holes, so the Treasury won't allocate money for this purpose. But it would almost certainly save money in the long run and probably improve NHS productivity. Reeves says she is maintaining investment. But is she investing in the right things? She needed to allocate money to significantly increasing medical training places now.
- There are many other areas of spending and taxation that I'd want to look hard at, including energy (which needs a fundamental review of how prices are set), water, road taxes and, potentially, a higher rate of VAT for some items but the main drive needs to be simplification. I'd set a target to get the UK tax code. It's regarded as the largest and most complex in the world, all 22,000 pages of it. Halving it in the parliament would be a good target and then half again by 2035. Let's get individuals and businesses thinking about and hiring advisers to grow their business, not thinking about tax and paying tax advisers to find loopholes.
I've outlined here plenty of spending increases and tax cuts as well as potential spending cuts. I don't know how they balance out but I don't have a team of Treasury officials at my command and models at my fingertips. The numbers would need to be balanced to bring about a reduction in the deficit from the budget year. If that meant an increase in income tax rates I would advocate that, politically difficult as it is: the basic rate of income tax hasn't gone up since 1975. Reeves could have argued the case for it. Someone will have to one day. She set her stall out as the one to take tough decisions. But she's bottled it big time.
I suspect my budget would rattle a lot of cages and would not be popular. But golly something like it is as needed as was Geoffrey Howe's in 1981.
Starmer and Reeves theoretically had a strong enough position to do something on the scale that Thatcher and Howe attempted then.
Instead Reeves's effort was a pusillanimous budget aimed at saving her skin and that of her boss, who are repenting at leisure for the hasty and deeply unwise promises they made in their manifesto.
But the incompetence of Reeves and Starmer is nothing new. Politicians have been held in low regard for a very long time:
“I could not help reflecting in my way upon the singular ill-luck of this my dear country, which as long as I ever remember it, and as far back as I have read, has always been governed by the only two or three people, out of two or three millions, totally incapable of governing and unfit to be trusted.”
This was Lord Chesterfield - in 1756.
Our fiscal policy's a mess - now's the time to fix it. David Smith, Sunday Times 21 December 2025
Here's how to cure the NHS and break out of a £20bn doom loop. Rishi Sunak, Sunday Times 7 December 2025
The real problem isn't the higher levies - it's who we're taxing. Dan Neidle Sunday Times 30 November 2025
The hypocrisy of NHS progressives: what morally righteous progressives will never tell you. Matt Goodwin's Substack, 12 December 2025
The £100k tax hurdle holding back Britain. Alice Wright, Sunday Times 2 November 2025
What if we ripped up the tax system and started again? George Nixon, Sunday Times 28 September 2025
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