We should all hope Rachel Reeves delivers growth - or our taxes are going up: SIMON LAMBERT
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Rachel Reeves faced a big challenge in her spending review.
This is the event where she sets down a marker for what Labour plans to do under Sir Keir Starmer and herself as Chancellor.
Funds are pledged to projects and government departments that fit with Labour’s priorities – future Budgets should align with a plan to make this happen.
Reeves faced a double challenge though, as she also needed to convince the country Labour can deliver growth and improve Britain, while balancing the books in a way that convinces markets the UK’s finances are under control.
The first element involves a commitment to spend, the second requires spending less or raising taxes.
Clearly, this is a difficult balancing act to pull off at the best of times.
But if you’ve promised not to raise taxes and many in your party are vehemently opposed to spending cuts to already threadbare public services, it’s even harder.
Rachel Reeves faced a balancing act against a tough backdrop in her spending review
Add in the backdrop of a screeching U-turn on winter fuel payments, a rise in job losses blamed on the Autumn Budget’s employer national insurance rise, and a Spring Statement that regained a wafer-thin £9.9billion fiscal rule buffer only for this to be wiped out soon after by Donald Trump’s tariff ructions, and you don’t envy Reeves at all.
As the old asking for directions joke punchline goes: ‘Well, I wouldn’t start from here’.
There was more money for defence, schools and the NHS and less money for other public services deemed less important, or able to be brushed under the carpet for now.
Ultimately though, the economic story remains the same as it was with Reeves’ Tory predecessors: meet your targets by outlining plans that involve growth picking up, productivity improving and cutting spending in the future.
Since Rishi Sunak there's also been some fiscal drag from frozen tax thresholds chucked in for good measure.
Based on the OBR’s five-year outlooks, this allows Chancellors to meet their fiscal rules. The fact that these forecasts inevitably turn out to be wrong, productivity doesn't improve, and things don’t end up balancing is conveniently ignored.
Yet, still we continue with the farce of policy by spreadsheet. As I’ve written before this fairytale economics is a terrible way to make decisions.
Fortunately, the Chancellor had one card up her sleeve, the change to borrowing rules that allowed extra infrastructure investment. It freed her up to announce £113billion of plans to knock Britain into shape.
These ranged from £39billion for affordable homes over a decade, to £30billion on nuclear power, £15billion on transport schemes.
Among the beneficiaries will be rail and bus links in the North, the Oxford to Cambridge Arc, and the Sizewell C nuclear plant.
Will these things deliver growth? Over time, they should do, but we will have to wait for that to arrive.
In the meantime, we face a summer of speculation over tax rises in an Autumn Budget – and with the three big earners of income tax, national insurance and VAT off the table due to Labour’s pre-election promise, that would mean more tinkering around the edges.
The target of tax rises is likely to be wealth, and hitting the wealthy means potentially going after pensions, savings and investments – the OECD even called for a council tax hike on big homes last week.
But there is an alternative scenario.
Through a combination of bad luck and her own mistakes, such as the mystifying ‘£22billion black hole’ gloomfest, Reeves has been caught out in her time as Chancellor.
Government borrowing costs have risen, borrowing itself has come in higher than forecast, and growth has disappointed. Meanwhile, the second iteration of President Trump has proved even more erratic than the first.
If things move in the opposite direction though, the UK’s finances could improve, and Reeves would catch a lucky break and not have to raise taxes in autumn.
This is not an entirely far-fetched scenario, GDP growth in early 2025 was better than expected, a calmer period could see government borrowing costs fall, and a pick-up in the economy would deliver extra tax revenue.
Its doubtful that much benefit will be seen from the infrastructure splurge for a while, but the government’s pledge to build homes and its threats against reluctant councils are already seeing more approved.
I’m reading increasing reports of councils waving through schemes they would previously have said no to. Most likely as they are worried about appeals if they turn developers down and get over-ruled.
This may come at a cost to the environment and local communities, while developers cash in, but if enough spades go in the ground, it will boost growth.
Meanwhile, companies seem to have front-loaded job cuts, the UK stock market is on the up, and I feel that we may be past the moment of peak consumer gloom.
All this could bring that much hoped for improvement in growth.
I know this would mess with many of our readers’ desire for schadenfreude over Labour, but to my mind, greater prosperity is definitely a better outcome.
Otherwise, taxes will surely be going up again soon.
Tax is an increasingly taxing subject for many people who feel hard done by as Britain's complicated system catches them out.
And, it's getting worse. So how far would you go to avoid your personal tax raid? And is it changing people's behaviour?
On this podcast, Georgie Frost, Lee Boyce and Simon Lambert dive into how the British tax tail is wagging the dog - and what you can do to avoid infuriating tax traps.
Press play to listen to the episode on the player above, or listen (and please subscribe and review us if you like the podcast) at Apple Podcasts and Spotify or visit our This is Money Podcast page.
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