Tax and spend on the agenda as Reeves makes ‘Labour choices’ in Budget

Chancellor Rachel Reeves has set out her Autumn Budget, containing a raft of tax increases in order to meet her fiscal rules and plug the black hole in the public finances, in the face of downgraded growth and productivity figures. In advance of Reeves’ speech, the news that the government’s fiscal watchdog, the Office for Budget Responsibility (OBR), had accidentally leaked its formal response to the Budget created a deeply unhelpful distraction for the Chancellor on one of the biggest days of her political career to date. 

Much of the build-up to the Budget focused on the question of whether the Chancellor would break the Labour Party’s manifesto commitment to not increase Income Tax or National Insurance. Despite weeks of pitch rolling, rather than pulling either of these levers, Reeves instead opted for a smorgasbord of tax increases, including a new Mansion Tax, new gambling levies, and new taxes on rental income. This approach has appropriately been referred to as a “scrabble bag” of measures by tax expert, Dan Neidle, and - for now, at least - saved the Chancellor any further pain within her own party and the bond markets. 

Rather than facing the political headache of breaking her manifesto commitments not to increase Income Tax or National Insurance, Reeves opted to continue the freeze on thresholds for another year, in a move that came as little surprise in the end. Savers were also in the Chancellor’s firing line as Reeves announced a new £2,000 cap on tax reliefs for salary sacrifice for pensions, while also cutting the annual ISA cash limit from £20,000 to £12,000. With the cap on salary sacrifice pensions not coming in until 2029, the Chancellor may be hoping that the economy will pick up to the point that she is able to reverse on this before it comes into effect. 

The cost of living was a central theme throughout her address to Parliament, with the Chancellor opting to scrap green levies on energy bills, which Reeves says will save families up to £150 per year from next year. In other cost-of-living-focused measures, fuel duty remains frozen for another year, while rail fares in England will also be frozen for the first time since 1996. 

Reeves announced the introduction of the High Value Council Tax Surcharge – dubbed the Mansion Tax – on properties over £2 million and £5 million. Reeves also announced significant increases in taxes for online gambling companies, while also introducing a new 3p per mile tax on electric and hybrid vehicle owners.

Throughout her speech Reeves referred to the “Labour choices” she had taken in a clear nod to her colleagues on the backbenches. This was especially the case in one of the government’s most significant political announcements - to abolish the two-child benefit cap. With this being an issue so close to the hearts of many of her colleagues in the Labour Party, her decision to scrap the cap will go down well within the party and may buy the government some more breathing space with would-be rebels. To that end, the Chancellor can regard the Budget as a job well done, with Labour MPs across the board supportive of the decision to remove the cap, albeit one which the government has ultimately been forced into. 

While Reeves has taken the decision to avoid the political headache of explicitly breaking a key manifesto commitment on tax, her approach of raising individual pockets of tax is not without risk. Many of the taxes announced do not come into effect for a number of years, and given the modest growth forecasts and stagnant productivity, the economic situation for the Chancellor remains challenging, with the likelihood of further tax rises in another 12 months. 

Reeves will also be buoyed by the response from the bond markets, with no sustained panic among investors and trades, helped by plenty of pitch rolling in advance of yesterday and then no huge surprises on the day. The shadow of the Liz Truss mini-Budget clearly still looms large over this government. Indeed, the Chancellor and Prime Minister were both keen to reference this in the chamber yesterday, and the muted response from the market will provide some reassurance to the Chancellor, even if the wider business community still grumbles. 

High-end property, online gambling, ride-hailing apps, and the makers of lattes and milkshakes are among those sectors on the sharpest end of the Budget, creating a very visible and vocal set of losers in a similar vein to farmers, private schools, and family businesses from last year’s Budget. 

While Reeves looks to have been successful in easing tensions within her party and calming the bond markets, questions remain as to the long-term strategy of the government. Despite several mentions of the word “growth” by the Chancellor, the substance of the key measures in the Budget suggests their priorities may lie elsewhere. The OBR revealed in their report that, "We have assessed that none of the policy measures in this Budget have a sufficiently material impact to justify adjusting our post-measures potential output forecast”, meaning there was no measures here that fundamentally increase growth. 

Indeed, the broad consensus appears to be that this was a ‘tax and spend’ budget, designed to appeal to Labour MPs’ priorities on public spending and welfare and shore up the party’s soft left flank, rather than appeal to business.

You can read our full analysis and insight into the Budget here