Goodbye to low-tax Britain

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Farewell then Singapore-on-Thames. In truth, we never really knew you. And welcome instead to Britain-sur-mer. The Conservatives took us there by accident; with Labour it appears to be by design. The defining significance of Rachel Reeves’ first Budget — the most significant for many years — is that Britain’s political path is towards proximity with the higher taxing nations of Europe.

One does not need to subscribe to hyperbolic Tory rhetoric about returning to the 1970s to recognise that this Budget heralded a major shift. It marks the surrender, for now, of the notion of low-tax, globally competitive Britain, and a bet on state investment-led growth. Reeves may have signalled that this was “one and done” in terms of future tax rises, but this one comes on top of an already elevated tax burden.

The numbers are jaw-dropping. The extra £40bn raised will take the tax burden to 38 per cent by the end of the decade, the highest on record. The size of the state is forecast to settle at 44 per cent of GDP. The state — and hence the taxpayer — is not simply paying for better public services. It is shouldering the burden of powering higher growth too.

There was never any doubt about the pain. Reeves started in a bad place, with wrecked public finances, low growth and public services starved of funds. The only hope was that after she had mapped out her higher tax, spend and borrowing future, it would be possible to see a route to better times.

Labour has two overarching missions both for this Budget and in general: to restore the crumbling fabric of Britain and to alter the country’s economic course towards a higher growth future. It is possible to see a pathway towards the first, though details of the promised reform which must accompany higher spending remain sketchy.

On growth, however, the route is less certain. While it is hard to quarrel with most of the promised new investment, it is not immediately obvious how this Budget alters the economic trajectory of the country. Where are the productivity gains? What is the new compelling argument that differentiates Britain from other advanced nations?

All forecasts come with health warnings, but the Office for Budget Responsibility’s assessment of the UK’s growth prospects for the next five years offers little cheer. At the end of this parliament the OBR expects Britain to be stumbling along with growth well below 2 per cent. Perhaps even more troubling is that it argues that the Budget may crowd out business investment.

Reeves will argue otherwise, stressing that she always said the reward for “fixing the foundations” comes over 10 years rather than five and that business investment will follow. That is the fundamental bet — for her and the country.

Until that pays off, however, and without ever stating it publicly, Labour is taking Britain to a different tax settlement. This is a place where the tax burden remains significantly higher and where those who demand better services will have to pay more for them. Her front-loaded spending plans give Reeves little choice other than to keep taxes high unless the economy transforms within two years. Many will argue that this was always necessary and that the body politic has for too long deluded itself with stop-start spending, but that was not Labour’s pitch to the voters.

For now Reeves has attempted to avoid making this too obvious to the “working people” Labour seeks to serve. Her priority was to protect them from noticeably bearing the burden. Huge tax rises arrived as costs to business while the only surprise was her decision not to further extend the Tory freeze on income tax thresholds. Likewise, continuing to freeze fuel duty may be politically prudent at a time of high energy costs but it sits oddly with the mantra of being a green government.

It could have been worse. The chancellor was deft enough to listen to some of the lobbying around the dangers of particular measures. And yet over time those taxes will also trickle through to the workers she had promised to protect, be it in lower pay or fewer new jobs.

The money raised by all this will be devoted to the first core mission. The state of public services demands more both in day-to-day and capital spending. No one who has waited for an ambulance, an operation, a police officer or a social care bed could be in any doubt about the need to restore the fabric of public provision. Even so, the nation will wait to see how the huge increase in health spending in particular will be used in a way that suggests a more sustainable future for the NHS.

On capital investment, funded by extra borrowing of around £28bn a year, Reeves met many expectations with money for house building, for rail lines and for crumbling schools.

If voters feel public services are improving, and the economy shows signs of growth, the tax gamble will have worked. The political danger for Labour is that, if it ducks that wider debate on how to fund services, it will eventually find itself ousted as voters conclude that enough repair work has been done and they would now like to keep more of their money.

The bigger test though will be whether Labour can spend this money wisely. So far there has been too little detail to instil confidence that current tax levels are only temporary. As with the growth plan, too much remains TBC.

Reeves had few choices and none of them were good. The change Labour was elected to deliver required something like this Budget. She has delivered the Big Bang needed and will argue that reform and growth will ease that upward tax pressure. Hopefully, she will be vindicated. But Labour has decisively shifted the needle on Britain’s tax burden. One can debate the pros and cons, but the fact cannot be denied.

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