I thought I'd let the dust settle on Rachel Reeves's budget before commenting. Then she started going back on things again, so I let it settle a bit more. Heavy fare for new year but I can't resist.
Some chancellors, notably George Osborne, have presented budgets which are greeted with plaudits but then fall apart rapidly and spectacularly. Reeves's second budget hasn't fallen apart yet but then her previous year's budget is still unravelling. Unfortunately it probably won't fall apart, but just add more insidious dead weight to hold back the economy and slowly strangle it.
Reeves had promised to take tough decisions and make growth her number one priority. She has done exactly the opposite and for a simple reason. She has played for time to save her skin and that of the PM. Only 18 months into the parliament, she knows that the electorate can't kick Labour out for another three years. So the budget wasn't aimed at the electorate, directly or by improving the economy, it was aimed at the one audience that could cause her early termination - Labour MPs.
There was an interminably long run up to the budget. Historically it has generally been in October so it was a bit of surprise when the government set 26 November as the date this year. But then, as every accountant knows, bad numbers take longer to add up.
Bizarrely, in the end the numbers weren't that bad, adding to the feeling that the chancellor doesn't really know which way is up. The delayed schedule gave her too much time to think and she appeared to change her mind on several important calls. I accept that pre-budget 'leaks' are often deliberate, as the Treasury flies a kite or two to either gauge reaction or manage expectation, usually by terrifying the life out of us so a tough budget ends up feeling as if it wasn't so bad. However, Rachel Reeves flew so many kites that they created an air traffic risk. The unprecedented and amateurish leak of the whole budget by the OBR before Reeves stood up to deliver her budget added to a general air of incompetence, indeed slapstick, even if that wasn't her fault.
What Reeves did with the extended timescale and kite flying was to compound the uncertainty she created in the run up to her first budget, when she persistently talked the economy down and threatened tough measures, though on a promise of 'once this parliament'. That uncertainty was only heightened by the government then partly backing down on some of its measures, most notably the pensioners' winter fuel allowance debacle. The dither was then exacerbated by the government announcing it would cut benefits but then backing down to squawks from its left wing, even though the 'cuts' were, as usual, reductions in future increases and the trajectory of the welfare bill is clearly unsustainable.
The uncertainty Reeves engendered before her first budget had already created a lot of problems. Businesses were hesitant in the four months period after the general election as they waited to see what Reeves's promise of a tough first budget brought. The increase in employer's NI didn't take effect for another 5 months until the start of the tax year in April but that meant that many businesses kept recruitment plans on hold. Many will already have been in self imposed limbo for most of a year before getting to this year's period of doubt. So the two Reeves budgets have caused a lot of damage just through uncertainty.
The damage was exacerbated by the air of perma-crisis in the public finances over comparatively small sums. This followed directly from Reeves's poor decision to have an extremely low level of "fiscal headroom" (let's just call it contingency) in her first budget. The £10bn she provided was a ridiculous 0.8% of the £1279bn total public sector spend for 2024-25 as estimated by the OBR. The twice yearly updates of public finances by the OBR almost inevitably meant a "black hole" would open up within six months of the first Reeves budget, leaving a further 6 month period of "will she raise taxes or cut spending?" before her second. With hindsight it's surprising previous chancellors haven't done what Labour has now and tasked the OBR with annual, not bi-annual, updates. It's almost comical that Reeves created a situation where talk of a black hole opening up was inevitable, having accused the previous government of leaving her with one (which they probably didn't, it's hard to tell through all the obfuscation).
I'm not sure which of her two budgets has been the most damaging. Farming got much of the attention first time round due to the inheritance tax change on passing on agricultural property. It seemed obvious to me that the government's assertion that only a small proportion of farms would be affected was transparent balderdash. On our walks around rural Wales we see many small farms which don't seem at all affluent but a top of the head estimate for the value of the livestock, consumables like feed and the book value of the machinery would add significantly to the value of the land and often take the value of small farm past the IHT threshold. Sure they can pay the bill over 10 years but if they are just about managing then that doesn't help. Then nearly 13 months after making the IHT change, Labour relented. They did it painfully slowly and in as ham-fisted a way as the original tax was introduced. There are good grounds for taxing farms and businesses in general, in particular the agricultural property relief scheme, which proved wide open to abuse (i.e. not really being used for agriculture). But the simplistic way it was originally done and then amended horrified tax expert Dan Neidle, who had been calling for the loophole to be closed. By one count this was the government's ninth U-turn.
The government won't admit that it got its numbers wrong for the number of farms affected but it clearly did. The change helps but it's still a poor tax, badly implemented. The average UK farm income is around £40,000 a year* - and I've read of very much lower regional figures. This is not a lot more than the number needed to support a family, let alone reinvest and one day pay IHT. So I still expect many marginal farms will gradually disappear. Others will be broken up with significant consolidation into mega-farms. The appearance of the countryside will undoubtedly change significantly.
However, farming is the smaller part of the problem. Many family owned businesses across the economy will now have to plan for an IHT bill in the future, which will mean stashing money away instead of investing it in the business. Others will just decide to sell up, even if the business has been in the family for generations. That consolidation will almost always be negative for growth - as a general rule big companies don't grow as quickly. We've never placed as much importance as we should on the small and medium sized enterprises in the economy, in contrast to the recognition given in Germany to the mittelstand, the businesses that are the backbone of that country's economy. In principle a tax on selling the asset, not passing it on as a going concern, would be the answer, though I'm sure there would be many problems in formulating such a tax.
Reeves's absurd claims to have inherited a truly dire economic situation, which made many wonder what she knew that the rest of us didn't (btw the answer to that was 'not much') made businesses put plans for investment and recruitment on hold. So of course the economy has stayed stagnant. Uncertainty and tax rises cause business to take a breather, wait and assess - wow, who knew? (The answer to that, of course, is nearly everyone but Rachel).
The dampening effect on business was exacerbated by the increase in Employer's NI and the remarkable reduction in the starting point to a salary of only £5,000. Awful for the ostensible number one priority - growth -but required for the actual number one priority i.e. not breaking the manifesto pledge to raise income tax and VAT, which would have been fairer.
Together with promising (and now delivering) damaging and mainly unnecessary changes to employment rights the result is that Labour has done just about everything it possibly could to stifle what it had said was its top priority, growth. As the economy has actually bumped along rather limply but not disastrously it makes one want to weep for how much better things could have been.
So the first Reeves budget was bad enough but what about the second?
As the country is still borrowing large amounts of money it was essential she retained the confidence of the bond markets. Only people without a brain - or very far to the left - could possibly espouse the idea that it is possible to "get beyond this thing of being in hock to the bond market" as Andy Burnham fatuously pronounced back in September. Andy has traditionally been considered part of the soft left of the Labour party. I had always thought that this terminology distinguished moderates from the hard left but it seems it actually means soft in the head. The kind of people who think others have to lend them money and that they can dictate the rate they'll pay clearly live in a land populated by clouds and cuckoos.
The bond markets reacted positively to the budget so that's a kind of tick. This reaction was mainly because Reeves increased her contingency cushion second time around, but still only to a marginally more credible figure of around £20bn. We're paying far too much on tick - the UK gets charged a higher rate than Germany, France or the USA, on far too big a sum. The only way to reduce both the rate we pay and the total amount is to borrow less. To be fair that is Reeves's target over the parliament. But that's not really soon enough. Because that way it might never actually happen. To borrow less we have to either cut spending, raise taxes, or a mix of both. It's really that simple.
Nearly all major western countries are borrowing far more (proportionately to their economies, not just in cash) than was the case until the last few decades. It has become a kind of addiction to what Arsene Wenger, in another context, called "financial doping". Like an opioid addict we keep wanting more. France, in an even worse position than us in terms of controlling social spending, has run 50 straight years of financial deficits. Europe has 10% of the world's population, 30% of its economy and 58% of its social spending. Each time things get tough the response of the large democracies is to throw ever more (of other people's) money at the problem. In the seven largest democracies the combined stimulus from governments and central banks rose from 1% of GDP in the recessions of the 1980s and 1990s to 3% in 2001, 12% in 2008 and 35% in 2020. The public, in the form of homeowners, stockholders and bondholders, have come to expect more help in each new crisis and to be insulated from any pain whatsoever. More borrowing, more benefits, more short term fixes (e.g. energy subsidies), more rights (shorter working weeks, work from home, ever greater job security), less responsiblity and no reform. Siren voices tell us it will be ok, growth will magically return, efficiencies will emerge, "waste" will be cut. If there is a bill others will pick it up (large companies, the wealthy) though of course it will mainly be consumers in prices and future taxpayers in the form of debt our children and grandchildren will have to cover. Like an addict we crave the fix, parties promise it to us and we reward them in elections.
The bleak picture in the above paragraph is a precis and paraphrase of some excellent recent columns by Matthew Syed. (He's better at words than me, which is why he gets paid for it). Bleakly he told us where this trajectory is taking us. It's the pattern of civilisational cycles throughout history from ancien regime France to the Qing dynasty, the Ottoman empire and ancient Maya. Success built on discipline drifts first into enlightenment and then complacency. Syed notes that the historian Will Durant put it this way: "A nation, like a man, is born stoic and dies epicurean." Syed feels that the West relaxed after the collapse of the Soviet Union, thinking it had "won". Peak hubris was followed by unfunded tax cuts and spending and democracies began to falter. To that list I'd add the "peace dividend" that we foolishly cashed by cutting defence spending. To make it worse we've become susceptible to populism. Electorates believed the daft promises we were made and blame those who didn't deliver them but then seem ready to believe even dafter hyperbole.
Syed concludes we need to go cold turkey, understand that short term sacrifice is the price of long term resilience and stop voting for unaffordable promises. He's not sure we can take the withdrawal symptoms.
So: cut costs or raise taxes? Traditionally cutting costs has been the more guaranteed route as tax rates raised or new taxes implemented don't always raise as much money as expected because those pesky taxpayers out there change their behaviour. For example, increasing capital gains tax rates tends to mean that people defer selling assets and so the tax take, at least in the short term, goes down instead of up.
Rachel's problem is that she's already blown it on costs by implementing then partly reversing the cut in OAP's winter fuel allowance and bottling her planned trimming of the burgeoning benefits bill when the left of her party, soft or otherwise, rebelled. This climb down is a double whammy as it has not only emboldened the Labour back benchers to fight any further proposals for "cuts" or "austerity" but made them think they can force increases in expenditure. That's now happened with the lifting of the two child benefit cap which was definitely not in Labour's manifesto.
Labour was on the right track on getting control of the benefits bill, even if the cut they planned but had to withdraw was tiny, £3.4bn in a bill projected to go from £314.7bn in 2024-25 to £406.2bn in 2030-31.Instead they increased it. When a young person living in London and claiming the maximum in health and disability benefits can get the the post-tax equivalent of a £40,000 salary you may wonder why the alarming number of NEETS isn't even higher. This is a can kicked down the road and someone else will have to come back to this problem before too long as the trend is unsustainable.
This budget was a disaster for people who aren't on benefits or a pension. One could parody the old Labour campaign slogan about not being old, or needing the health service if the Tories got in - don't be an employee working hard to provide for your family under Labour: your student loan payments will go up, you'll get punished with high marginal tax cliff edges if you do well and your child benefit will get filched, even if your family income is lower than that of families who retain their child benefit because their individual incomes don't trigger the claw back. Even worse, you may have a lower income than a family living entirely on benefits - unless you earn over 40 grand. Labour should be a party committed to fairness. It clearly isn't.
Reeves has maintained capital investment, as she was quick to tell us "unlike George Osborne". That is indeed a good thing as public sector investment has usually suffered when chancellors needed to make savings. But that's literally only half the story. Public sector and private sector investment in the economy are both just shy of £140bn a year. The drag on private investment is just as damaging as if she'd made the cut herself to the Treasury spend.
So, while it was greeted with some relief by many, including business, because it was perceived to be not as bad as it could have been, nonethess the second Reeves effort was a poor and damaging budget. Rather than dust settling it has thrown a sticky blanket over the economy.
It was a missed opportunity, a return to the playbook of Gordon Brown Labour: make more than half the country reliant on benefits and they'll resist "cuts" and side with us. Now an amazing two-thirds of households take more from the state than they pay into it. Households in the sixth income decile, earning £40,800 before tax, now receive £5,000 a year more from the state than they pay in. In 2002 a sixth decile household would have been contributing £3,100 a year. Tom Calver suggests that if the upper and middle classes turn to the private sector for healthcare and education while being asked to foot the bill for poorly run state services the principles of the welfare state could be under threat: a welfare state that leans more heavily on people who use it least goes against the principle of universal solidarity that the welfare state was founded on and could prove fragile.
It was an awful budget for young people, who see taxes going up, university loan repayments going up, rents going up, no houses to buy, poor public services and the goodies going to pensioners and those on benefits. "What's the point?" they must wonder. A budget to throttle ambition, drive and aspiration. A budget that did nothing for the growth that Reeves needs to make her numbers add up in the years beyond the budget year.
Some budgets unravel quickly. It seems that Reeves's unravel in slow motion. However, it took the Blair-Brown governments nearly a decade to completely run out of ideas and resort to a traditional Labour focus on tax and spend with the spend focussed on benefits. In contrast it took Rachel Reeves less than 16 months to do the same as it turns out she didn't have any ideas to start with.
Starmer and Reeves portrayed themselves as serious people, the growns ups in the room. Well they are definitely serious in that they're no fun, but they aren't serious in terms of having vision, resolve and courage.
"All well and good, smart arse, but what would you do?" you may say. Ah, that comes next...
*when I told Mrs H the stat today about what many farms earn in a year and, later, that Everton midfielder James Garner is negotiating hard over a new contract as he "only" earns £30,000 a week and presumably wants to earn more like 3 times that sum like his more experienced and more recently signed team mates, she killed the conversation dead, saying the the similarity of the numbers, one per year and one per week, made her feel "sick"
The title of this post is a tweak of what Andy Haldane said - that Rachel Reeves has played a "bad hand ...pretty poorly". Reeves once claimed to have worked for the Bank of England for a decade, but it turned out she'd been there about half that time, some of that studying. Haldane was at the Bank for over 3 decades, eventually filling the roles of chief economist and executive director of monetary analysis and statistics.
A brief guide to the public finances. OBR 3 April 2025
Nobody wants a bond crisis but it may be the safest way to wake us up: the debt addicted West risks being trampled by Putin and Xi unless it can wean itself off its excesses. Matthew Syed, Sunday Times 14 September 2025
Numbed by borrowing, we can't see how badly we need to go cold turkey. The triumph of modern democracy looks short-lived: we are destroying it with our aversion to pain. Matthew Syed, Sunday Times 16 November 2025
Another budget that robs the young. No wonder half of them intend to vote Green. Robert Colville, Sunday Times 30 November 2025. This column included the stat about health and disability benefits being equivalent to a £40,000+ salary but I've also seen it elsewhere.
How many households give more than they take from the state? Tom Calver's Go Figure column, Sunday Times 30 November 2025. My concern is simpler than Calver's: it's just very inefficient to take tax off people and give it back to them in benefits and subsidies and so ends up costing more. Calver's figures take account of rail travel subsidies as well as health, education and other public services.
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