A Budget for growth? The Chancellor’s high tax agenda will kill innovation

Rachel Reeves has made one thing clear – the Thatcher-Blair pro-enterprise economic consensus is dead

One of Rachel Reeves’ many promises was to run the most pro-business Treasury ever. Looking at the detail of her first Budget, you would be hard pressed to find anything of substance to justify such an extravagant claim.
The few crumbs of comfort that fell from her table were completely overwhelmed by the thumping great £25 billion she plans to levy on business via higher employer National Insurance contributions. Much of the rest of her tax raising was scarcely designed to benefit enterprise either, with both capital gains and inheritance tax hit hard for extra revenues. This is a Chancellor who seems not to understand the first thing about either running a business or promoting enterprise.
Where on earth does she think the money is going to come from to finance both such a swingeing increase in social charges and the inflation busting rise in the minimum wage the Chancellor also confirmed.
It’s not going to fall like manna from heaven, that’s for sure; employers will instead take steps to recover the extra costs either via fewer jobs, or in reduced wages over time, or in higher prices, or more likely a combination of all three.
In some respects, this was just a classic, old school Labour Budget. The machine gun delivery and bewildering array of initiatives was reminiscent of Gordon Brown, who by the way seems to have been the Budget’s true éminence grise. It was hard not to get lost in the undergrowth, which was presumably deliberate.
When all is said and done, however, Reeves plans simply to tax more, spend more and borrow more. No surprises there then. It’s what you would expect from a Labour Chancellor.
But it is the sheer scale of it that really alarms. This is succinctly summarised in a single sentence in the Office for Budget Responsibility’s Economic and Fiscal Outlook. “As a result [of these changes]”, the OBR says, “the size of the state is forecast to settle at 44 percent of GDP by the end of the decade, almost 5 percentage points higher than before the pandemic”.
This is a massive change that brings the UK materially closer to a Continental style socio-economic model, with a much bigger role for the state than we have seen in decades, if indeed ever before in peacetime. The “let the markets decide” approach which has characterised UK economic policy since the Thatcher government of the 1980s is to be replaced by a “government decides” mindset where the big investment decisions are directed by the state.
The history of such investment in the UK, it should be said, provides little encouragement for the view that state directed spending of this sort will add significantly to growth. Indeed, the OBR says as much. The latest growth forecasts until the end of the decade are little different from what they were under the previous Government.
To accommodate this change in approach, the Chancellor has done precisely what she said she wouldn’t, and fiddled with the fiscal rules so as to allow for a major increase in borrowing. 
This manoeuvre had been so widely trailed in the press, as indeed was virtually everything else of any significance that the Budget had to offer, so it shouldn’t really have come as a surprise to anyone.
All the same, there was a noticeably adverse reaction in the gilts market, where yields spiked; on cue, the Debt Management Office raised its estimate of government debt issuance this financial year to a jaw dropping £300 billion, the second highest level ever after the extraordinary pandemic related expenditures of 2020.
There’s no Liz Truss-style panic yet, but markets are plainly nervous about the scale of the fiscal loosening announced, and remain to be convinced that the Chancellor’s “invest, invest, invest” mantra is going to deliver the higher growth she hopes for.
In attempting to sweet talk the markets, Reeves is making a big deal out the difference between current spending and investment spending. Taken together, Budget policies raise total spending relative to what the previous Government was planning by around £70 billion a year over the next five years, of which around two thirds go on current and one third on capital spending.
Around half these expenditures are funded by tax increases and the rest by increased borrowing. But whichever way you look at it, it’s not a pretty picture.
When the Chancellor talks of increased capital or investment spending, most people would think in terms of big infrastructure such as roads, rail and electricity networks. 
But actually a significant amount of the new investment budget is earmarked for the NHS and schools, spending which ordinarily you might think of as current spending. Designating it as capital spending is just a fig leaf for what in essence is merely a big expansion in the size of the public sector.
Even after adjusting the fiscal rules to allow for this dam-burst of borrowing to spend, the Chancellor only meets them by the slimmest of margins, with just £15.7 billion of “headroom” left by the end of the forecast period.
As the OBR remarks, “these margins are a small fraction of the risks around the central forecast”, which depends crucially on highly uncertain judgements on the paths for productivity, inactivity, net migration, interest rates and inflation.
Still, there is one tradition that the Chancellor has stayed true to. This is to again freeze fuel duties, which were scheduled to rise at least in line with inflation. Like all her Conservative predecessors, however, her assumed fiscal “headroom” depends crucially on the idea that they will indeed rise in future, even though to think so is a triumph of hope over experience.
The decision to freeze so as not to hit “working people” also sits awkwardly with the Government’s plans to effectively close down Britain’s remaining oil and gas production industry in pursuit of delusional green energy goals.
Still, we should I suppose be thankful for small mercies. The Chancellor seems to have been persuaded against a major smash and grab raid on pensions savings. Instead she’s confined herself to closing the Inheritance Tax concession under which unused pension pots can be handed to descendants tax free.
You’ll be pleased to know that the new regime is not due to come into force before April 2027, so you can still hand on your pension savings tax free by dying before then.
There was, however, no attempt to interfere with the tax free lump sum, or higher rate tax reliefs on pension savings. Such delights are no doubt being held back for a later date.
The Chancellor could still get lucky; if the global economy remains benign, UK growth might yet come in a little higher than the OBR expects. 
But it’s hard to be optimistic after a Budget that hits enterprise as hard as this one. A penny to a pound, none of this will work, and after five years of Labour rule we’ll be even further up to our necks in debt, with higher interest rates to match.