This week brings the UK Budget as on Wednesday Chancellor Rachel Reeves will stand up and set out what she wants to do. It has been and remains a fast moving market because almost as quickly as she thinks up a policy to help with her latest fiscal Black Hole Labour back benchers reject it. But I wish to start with what is further confirmation of my post on the 19th of September when I pointed out that the present government had lost control of fiscal policy.
If one steps back and takes stock we look to be in rather a trap. We struggle to raise taxes and if we do they apply a brake to the economy. 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.
Spending Problems
As I pointed out above attempts to rein in public spending earlier this year were rejected by Labour back benchers. In fact the situation for spending has got worse as new commitments have arrived.
Rachel Reeves has been urged by the Conservatives to show some “backbone” and control welfare spending in next week’s tax-raising Budget, as she prepares to spend over £3bn on ending the two-child benefit cap.
The chancellor has indicated to Labour MPs that the cap, introduced by the Tories in 2017, will be lifted in her Budget on Wednesday, in spite of her private reservations and fears in Downing Street about the political fallout of the move. ( Financial Times)
This is yet another U-Turn on welfare benefits.
After the welfare defeat in July, Reeves’ allies immediately warned Labour rebels that there would not be any money available for ending the two-child cap. ( Financial Times)
So rather than spending less as she planned she is so weak she is being forced to spend more. Then over the weekend another new spending commitment emerged.
Rail fares in England are set to be frozen for the first time in 30 years in next week’s Budget as part of a broader attempt to tackle the cost of living crisis.
Freezing rail fares would “keep household costs down for hardworking families” and drive economic growth by making travel more affordable, the Treasury said.
On an initial level this looks welcome in terms of its impact on inflation and hence the cost of living.The catch is that instead it will be a further burden on the public finances and it turns out the amount is more significant than it may first appear.
The Treasury refused to say how much the measure would cost, although one official said consumers would benefit “by £600mn”. ( Financial Times)
Also when you are looking at helping people then you are redistributing money so we also need to look at who pays for this? As they lose. So the cost of living effect is likely to turn out to be an illusion although no doubt they will try to hide that.
The numbers above add to the existing problem that was highlighted by the official release on the public finances on Friday.
Central government’s current expenditure was provisionally estimated at £649.9 billion in the FY to October 2025, £51.2 billion (or 8.5%) more than in the same seven-month period a year ago.
So allowing for inflation that is a real rise of around 4% for the financial year so far.
Taxes and Receipts
The plan at the time of the emergency statement from the Chancellor on the 4th of this month was to raise the rate of basic Income Tax as that gets in a tidy sum of money. Somewhere between £7 and 8 billion for each extra penny. But her back benchers rejected that leaving her plans in disarray. We can see how much in disarray by the next plan which frankly had more holes in it than a Swiss cheese. It was to raise a type of wealth tax and let me hand you over to The Times for developments over the weekend.
The chancellor has pared back plans for the property tax, increasing the threshold at which it applies from £1.5 million to £2 million to ensure that the most expensive properties are affected.
The reason for this is that it would have impacted on the inner London boroughs many of whom including mine ( Battersea) have Labour MPs. So no doubt there has been another rebellion and the excuse is below.
Reeves was initially planning a broader version of the tax, which would have started at £1.5 million and hit 300,000 households. However, there were concerns that the move would affect people who are “asset rich and cash poor”, particularly in London, and the threshold has been raised.
Actually people hit by the latest plan would be at risk of being even more asset rich and cash poor, which I guess they are hoping people will not spot. But for the purposes of taxes raised we have a problem now.
Reeves plans to raise £400-£450 million from the levy, which will be collected through council tax bills. More expensive homes will pay significantly more.
Whilst all revenue is welcome in our present crisis that is not very much and does not even pay for the rail fares freeze. Also these sort of policies circle the drain and let me illustrate that via this from Sophy Ridge of Sky News.
Peter Kyle in response to billionaire Lakshmi Mittal leaving the UK “Whenever anyone needs to leave the UK to succeed, I think it’s a worry” Do you acknowledge that some of it is because of the tax decisions of this gvt? “Yes, I do, I do. I’m not going to duck the fact that we have put up taxes and we’ve closed some of the loopholes for non-doms”
Regular readers may recall when I pointed out that higher wealth taxes in Norway led to less revenue not more and the UK is now on that road.The higher council taxes will only make that worse and frankly that is assuming they can do it at all.
The Treasury is expected to use the existing council tax system as the basis for the charge by revaluing 2.4 million of the most valuable properties across bands F, G and H. ( The Times)
No doubt there will be loads of appeals against revaluations with the only winners being lawyers. Plus there is the effect on the economy.
The Times has been told that the Office for Budget Responsibility, the budget watchdog, has suggested that the plans could lead to a slowdown at the top of the housing market
Actually it already has and as someone who wants lower house prices I would welcome it but for the fact these are hardly likely to be the houses that first-time buyers are looking at. Another sign of the problems created by the new regime came last Tuesday via this official release and the emphasis is mine.
The revised British net migration is now estimated to be negative 114,000 to the YE December 2024, compared with our provisional estimate of negative 17,000 previously published; this is mainly because of emigration being revised upwards from 77,000 to 257,000 using our new methods.
If these are the people the present government is trying to tax as seems likely it is making things worse rather than better.
The next problem here is that with so much emphasis on a wealth tax that at best will not raise much where will they raise more money? Bloomberg are expecting something like this.
Instead of a plain income tax hike, we’re likely to see a smorgasbord of complex, fiddly measures that will add significantly to Britain’s already byzantine tax code. These include extra property charges, yet more changes to the relief applied to pension contributions and even subjecting Uber fares to value-added Tax.
Comment
As you can see the spending position is clear but the revenue one has become more and more confused. With bond yields remaining elevated the Chancellor will have at least one eye on the bond markets which have frankly punished her for the Budget from October 2024. Then when you think she could not have dug a bigger hole for herself there is the body she poured so much praise on.
BREAKING: The independent Office for Budget Responsibility (OBR) is set to downgrade the UK’s growth forecast for 2026 and for the remaining years of this parliament. ( Sky News)
So the numbers just got worse and there is an irony as she hung her hat on a body that is so useless. On that subject where has all the economic growth that we were promised gone? I am afraid we look set for spending and borrowing to sing along with Andrea True Connection.
(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?
(More, more, more) How do you like it? How do you like it?
Just when you thought the UK ship of state could not get more incompetent the Bank of England will sell £750 million of UK government bonds this afternoon.
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