Three moments where Budgets have gone wrong

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Good morning. Just two days until the first Labour Budget since 2010 — and, equally importantly, the first Labour Budget to be delivered under the scrutiny of the Office for Budget Responsibility, which was established by former chancellor George Osborne in May 2010.

Indeed, one reason why there is a long gap between the election and the new government’s first Budget is this is the first time we have had a transfer of power since the creation of the OBR.

It has been further lengthened by the timing of the election, which fell at an odd point in the parliamentary calendar, but the more noteworthy reason for the delay for our purposes is that Rachel Reeves has less power to shape the final Budget than the previous Labour chancellor Alistair Darling did.

This is a good thing, I think: among other things it means that the chancellor of the day can’t simply go “oh well, I’ll change the forecasts” to create more wriggle room for themselves.

There will be a lot to say about what Labour is doing on October 30 and thereafter (Inside Politics will be sending a bonus newsletter on Wednesday afternoon), but today I wanted to talk about three ways Budgets have gone wrong before — and what echoes I’ll be looking out for this week.

Two days after the Budget, my colleagues will examine what it means for the UK’s economic prospects in a live webinar at 1pm (free for subscribers here).

Inside Politics is edited by Georgina Quach. Read the previous edition of the newsletter here. Please send gossip, thoughts and feedback to [email protected]

The ghosts of Budgets past

The ‘omnishambles’ budget 2012

If Rachel Reeves’ first Budget is unpopular, then I suspect we will hear a lot from Labour about George Osborne’s 2010 to 2012 fiscal events. None of them were particularly popular, and the 2012 one in particular was really very unpopular indeed.

The centrepiece of this Budget was Osborne unpicking Alistair Darling’s 50p top rate of income tax and reducing it to 45p, plus a series of relatively minor tax changes — in terms of revenue, at least — that became politically controversial. This was the only year of the 2010 to 2015 parliament in which Labour’s electoral performances matched their opinion poll lead.

This is the sort of unpopular Budget that Keir Starmer and Reeves are geared up to deliver — one that they feel will bear fruit over the next four to five years.

The complicated success:

The set piece of Gordon Brown’s 2007 Budget was a cut in the basic rate of income tax, which he partly paid for by scrapping the 10p starting rate of tax (which he himself had introduced). The major actions of Nigel Lawson’s Budgets in 1987 and 1988 were his tax cuts: he reduced the basic rate from 29p in the pound to 25p, and cut the top rate from 60p to 40p.

Both these changes endured for a long time: no one has restored the 10p tax rate, because they judged, as Brown had, that while it sounds very good on paper, it didn’t actually do very much to help the poorest earners while undermining the tax base. Lawson’s cut to the top rate remained in place until the global financial crisis.

But Lawson’s forecasts led him to underestimate the strength of the British economy, and the “Lawson boom” that followed — a period of rapid economic growth — turned to bust. Brown’s premiership and standing took a huge battering over the abolition of the 10p rate.

The uncomplicated failure

I am going to assume that no one who reads this newsletter needs to be reminded of what happened to Liz Truss and Kwasi Kwarteng in the autumn of 2022.

The long-run failure

In 1997, the Labour government came to power having promised not to increase income tax (sound familiar?). Gordon Brown did, however, raise taxes in an awful lot of other ways. One of the consequences of his first Budget in 1997 was in helping to kill off the defined benefit pension for good, by removing the tax credit that pension funds could reclaim on dividends paid by British companies. This has created a huge problem in the long run. (We talked about this a bit last week on the Institute for Fiscal Studies podcast, where I made a guest appearance.)

I’m not ruling out that any of these may have echoes, or indeed that Rachel Reeves’ first Budget is an unqualified success. But the echo that I am most worried about is this one: that one of the levers that Reeves pulls to increase tax revenues ends up creating as many problems as Brown’s abolition of advanced corporation tax relief.

Now try this

I very much enjoyed The Whip — a heist movie with a social conscience, in which a carer recruits an unlikely team to steal the Chief Whip’s little black book to stop the passage of a programme of welfare cuts — during its all-too-brief time in cinemas. Cracking soundtrack, too. Fortunately it is now on Amazon Video.