Yesterday’s Budget presented by Chancellor Rachel Reeves covered a lot of ground. But let us start our look at the economics with one fundamental issue.
That is why today, I am restoring stability to our public finances… Public sector net borrowing will be £105.6bn in 2025-26, £88.5bn in 2026-27, £72.2bn in 2027-28, £71.9bn in 2028-29 and £70.6bn in 2029-2930……To restore stability to our public finances.
That was from last years Budget speech and the Chancellor presented it as a one and done move as she raised taxes by £40 billion and spending by £70 billion. Now let us move onto yesterday’s Budget speech from her.
public sector net borrowing is due to be £112.1bn or 3.5% of GDP in 26/27, 3.0% in 27/28, 2.6% in 28/29, 1.9% in 29/30 and 1.9% in 30/31 – ending at £67.2bn
Notice how she switches to percentages to try to make the numbers as opaque as possible.Bur we can compare 26/27 directly where the forecast of £88.5 billion has risen to £112,5 billion. So some £24 billion more and that is why this was always going to be an embarrassment for her claims last year of fixing the public finances. As I pointed out back on October 31st last year that Budget was.
As you can see this is both contractionary ( fewer jobs) and inflationary.
Plus she chose to borrow more or exactly the opposite of her fixing the public finances rhetoric.
leaving a further £35bn to be funded through higher borrowing. ( in 2026-27)
Returning to yesterday’s speech it was full of rhetoric which denied reality.
Not reckless borrowing.
Below are the latest figures for the public finances.
Borrowing in the financial year to October 2025 was £116.8 billion; this was £9.0 billion (or 8.4%) more than in the same seven-month period of 2024 and the second-highest April to October borrowing (not adjusted for inflation) on record, after that of 2020.
This is why her rhetoric was about borrowing far into the future as borrowing now is higher. Looking ahead you can forecast anything and let’s face it the Office for Budget Responsibility usually does!
Because of this Budget, borrowing will fall as a share of GDP in every year of this forecast…
…our Net Financial Debt will be lower at the end of the forecast than it is today…
We are back to a rather desperate manipulation of numbers. For example I looked up the rise in the UK net debt since she became Chancellor and it has risen by around £160 billion from £2.74 trillion to £2.9 trillion. Yet she claims it will fall.
So she was singing along with The Sweet.
Does anyone know the way? Did we hear someone say?(We just haven’t got a clue what to do!)Does anyone know the way? There’s got to be a way(To blockbuster)
Spending
Chancellor Rachel Reeves found herself in a position where she must realise her spending last year was a mistake but was obliged to repeat it.
For starters, while few expected spending restraint in this Budget, the scale of new commitments was striking. Reversals on planned welfare reforms and the removal of the two-child limit on benefits will cost over £9bn. With spending as a share of GDP forecast to remain 5 percentage points above its pre-pandemic level by 2030, there was little detail on where much-needed future savings might come from. ( Financial Times)
I have chosen the Financial Times as they are supporters of this government and are now mulling the consequences of that. But if we as usual skip the politics the economic reality was that she was now singing along with Britney,
Oops, I did it againI played with your heartGot lost in the gameOh, baby, baby
Indeed the Financial Times seems to be slowly catching up with a point I made on September 19th.
We seem incapable of controlling spending as the summer U-Turns on benefit spending and the winter fuel allowance showed. So the numbers slip away which leads to both higher inflation and bond yields which only exacerbate the issue.
Or as the FT editorial puts it today.
With spending as a share of GDP forecast to remain 5 percentage points above its pre-pandemic level by 2030, there was little detail on where much-needed future savings might come from.
Tax Rises
So this was inevitable in spite of all the past claims about fixing the public finances.
As a result, Reeves has relied once again on higher taxes to do the heavy lifting. ( Financial Times)
The detail is below.
The chancellor’s main revenue-raising measure was a three-year freeze to personal tax thresholds, which will hit middle earners in particular. This was paired with a raid on high-value properties and increases to income tax rates on property, savings and dividends. ( Financial Times)
I will let other argue over whether the fiscal stealth tax of not raising personal income tax thresholds breaks the Manifesto promise In terms of the economics it is yet again contractionary via a reduction in incentives. I saw a report that suggested by the end of the period ( 2031) the UK personal allowance or zero tax rate would have been £17,000 rather than the present £12,570 if it has been indexed.
To my mind there were two major problems here in addition to the higher taxation issue. We have a version of Jam Tomorrow as apart from the thresholds move most of the tax rises are for the future and some are for the next Parliament. If a government with a large majority cannot raise taxes now does anyone believe the same backbenchers will vote for them as a General Election approaches?
Next up is that they are unlikely to work. There will be a 3 pence per mile charge for electric vehicles and half that for hybrids. When challenged on BBC Breakfast TV the Chancellor said it will be picked up by the MOT test apparently not realising cars under 3 years do not have one. Anyone who recalls the era of chipped cars will know what happens next? Then there is the Mansion Tax which I think Merryn Somerset Webb summed up well.
Reeves plan to hit houses over £2m with surcharge. Who decides what’s worth £2m? Esp in today’s collapsing London market??And as prices change to price in the new liability. Who mediates every challenge? There’s a reason no one has been idiot enough to do this before.
Number Crunching for Student Loans
The OBR has rather savaged this albeit inadvertently.
The Government has announced a freeze to the repayments and interest rate thresholds for Plan 2 student loan repayments for three years starting from 2027-28. These changes increase cash receipts by £0.4 billion a year in the medium term, as a higher portion of income is subject to repayment and a higher interest rate.
No interest-rate cuts from the present 7.9% for student loans. But Hey Presto! There is some magic too.
These changes also result in a one-off reduction in borrowing in 2026-27 of £5.6 billion related to reduced spending.
How?
This reflects the increased value of the loan book due to greater repayments in future – under accounting rules this is scored as a capital transfer from households to the government in the year in which the legislation is enacted.
So as Imagination put it.
Could it be that it’s just an illusionPutting me back in all this confusionCould it be that it’s just an illusion nowCould it be that it’s just an illusionPutting me back in all this confusionCould it be that it’s just an illusion now
Comment
I thought I would leave to last this.
The OBR say today that this will drive growth across our country in the next five years…
… and in the longer term increase GDP by up to 1.4%.
That was from last year’s Budget and here is the OBR from this year.
Real GDP is forecast to grow by 1.5 per cent on average over the forecast, 0.3 percentage points slower than we projected in March, due to lower underlying productivity growth.
The whole subject of economic growth has gone rather quiet which is always very revealing. What has happened to house building after employing more bureaucrats?
And we will deliver on our manifesto commitment to hire hundreds of new planning officers, to get Britain building again.
Ditto this.
First, our portfolio of new financial investments will be delivered by expert bodies like the National Wealth Fund which must, by default, earn a rate of return at least as large as that on gilts.
Surely such an expert body has done something apart from employ bureaucrats in the last 12 months?
Because growth doesn’t just appear out of thin air.
Or does it? Anyway she has now twice raised taxes on those that do this.
It is built – patiently, and stubbornly, by the people who take risks,
By founders who bet their savings on an idea,
She just taxed savings more as well.
By firms breaking into new markets, developing new technologies, creating new jobs and new opportunities,
By the men and the women who work hard every day in all parts of our country.
Our job is not to watch from the sidelines, but to partner with them— backing them every step of the way.
Or as the Financial Times put it.
The detrimental effects of these measures on work, investment and confidence would be less concerning had the chancellor’s broader package included growth-enhancing measures.
