Rachel Reeves' Halloween Nightmare: A Budget of Taxes, Borrowing and Deception

Wednesday saw Labour Chancellor Rachel Reeves deliver the biggest tax-rising budget for over 30 years and undergo a reckless borrowing spree; therefore breaking her pre-election promises.

She begun her speech with a barrage of attacks on the outgoing Conservative administration, arguing that her fictitious ￡22 billion black hole claim had forced her to make tough decisions “in the national interest”.

Positioning Labour as the new party of economic stability and fiscal responsibility, she promised to never again allow “a government to play fast and loose with the public finances”. The irony is that her budget proves she also cannot be trusted with the public finances.

Headline tax rises

Reeves’ first budget as Chancellor raised taxes by over ￡40 billion, with some of the headline changes being:

• Employers National Insurance increased by 1.2% to 15% from April

• Threshold level at which employers start paying National Insurance reduced from ￡9,100 to ￡5,000
• Inheritance tax thresholds frozen until 2030 – with unspent pensions included from 2027

• Bus fare cap increased from ￡2 to ￡3 until end of next year
• VAT introduced on private school fees

The biggest tax rise comes from the increase to Employers National Insurance, which the Treasury estimates will raise around ￡25 billion in revenue. Very quickly the OBR disputed this figure, arguing that it would only raise ￡16.1 billion, as the measure will see wages cut by ￡7.5 billion, and overall profits falling by ￡1 billion.

For all this talk of ‘not raising taxes on working people’, Reeves has done exactly that, albeit indirectly. Employers will respond to this change by reducing employee wages, cutting jobs, and reducing any worker benefits. It will discourage investment, and force them to raise their prices, hurting consumers and driving up inflation.

These consequences, further exacerbated by the large increase in the national minimum wage, are catastrophic for businesses, and therefore entrepreneurship, and economic growth.

So much for economic growth being their Number 1 mission.

Labour clearly don’t understand that no government has ever taxed its way to growth. Government can only create the conditions for growth, not prompt it. It is hard working people and successful businesses, big and small, up and down the country who ultimately drive economic growth.

As for the other measures, they epitomise of the politics of envy. Freezing inheritance tax thresholds, already an evil taxation method in itself, and including people’s pension pots, proves the morals of this Labour government. Nobody is allowed to pass on their money to their beloved families until Mr Taxman steals his undeserved portion.

The VAT on private school fees, the only measure actually true to Labour’s manifesto, is also envious politics. Starmer has previously talked about it as ending a tax break, not adding a new tax, proving his mindset that the money individuals have is really government money just waiting to be taken. This policy, which will see private school fees increase suddenly by 20% will force many students to flock to the state sector, putting further pressure on our already overcrowded schools, backfiring massively.

Borrowing spree

In a major budget announcement, Rachel Reeves changed the government’s fiscal rules, which means that debt is now defined as net financial debt, which she argued recognises “that government investment delivers returns for taxpayers”.

What this essentially means is that she can borrow billions more to invest without breaking any fiscal rules.

So overall, this budget raises taxes by an additional ￡41 billion per year, but also increases borrowing by ￡142 billion over the next 5 years.

It’s as if there was no ￡22 billion black hole.

Rishi Sunak put it best when he argued that Reeves had fiddled with our fiscal rules to enact “an enormous borrowing spree”, saddling “our children and grandchildren with billions upon billions more debt”, and pushing up interest rates”.

Predictably, the markets reacted terribly to this change, with the value of the pound plummeting, and 10 year government gilt yields rose by 0.3 points to 4.5%. It also means that government debt will rise to 96% of GDP in 5 years time.

So why is this bad?

• Government has to pay interest on the money it has borrowed - which will amount to around ￡109 billion in the current financial year
• This is now the 4th biggest expense for the government, behind only welfare, the NHS, and education
• As the national debt grows, more interest needs to be paid, leaving less money for public services
• It also crowds out private investment, as the government competes with them for these borrowed funds

So the real black hole is not ￡22 billion, its ￡2.8 trillion - the size of the national debt.

By embarking on this huge borrowing spree, Reeves looks set to inflate our national debt even more, leaving the problem for future generations.

Outright deception

The main issue with this budget isn’t the tax rises or the borrowing, its the deception.

Repeatedly during the election campaign, Labour said they wouldn’t raise taxes on working people - they have.

They said their policies were fully costed and fully funded, and that no more tax rises or borrowing were required.

Labour have lied their way into Number 10, and this first budget is worlds apart from what was promised in the election manifesto.

A supporter would argue that the ￡22 billion black hole necessitated tax rises. The OBR have confirmed that only ￡9 billion of spending from the last government was unaccounted for, and that Labour’s own public sector pay rises in July caused this fiscal gap.

But this argument is also completely defunct when they have simultaneously enacted a borrowing spree such as this. Why couldn’t they have just borrowed that ￡22 billion? Their narrative makes no sense.

Starmer said in a key NHS speech less than a month ago that the NHS would receive no more money without reform. And yet the NHS has just received ￡22 billion of extra funding, thanks to Reeves’ borrowing. Yet more deception.

The worst part about the reckless borrowing and the tax rises is that cuts can be made that could make investment in public services, or tax cuts, feasible.

Reeves is pledging ￡3 billion to Ukraine each year, whilst simultaneously removing ￡1.4 billion of support to Britain’s vulnerable pensioners, who have had their winter fuel allowance removed.

The government still spends ￡12.6 billion on foreign aid, ￡4-5 billion a year on housing asylum seekers, while tackling homelessness gets just ￡230 million.

Our welfare bill continues to balloon every year, with no indication that either party intends to do anything about it.

Labour are leading a high tax, high waste, low growth economy. Essentially what we’ve had under the Tories for the last 14 years, but even worse.

Conclusions

This Labour government has their priorities backwards, and are economically incompetent.

If they are serious about economic growth, they must chart a path to lower taxes. Reeves may argue that we need investment in key industries, but this does not necessitate excessive borrowing; the private sector exists.

These tax rises are roadblock to entrepreneurship, innovation, investment, skills and growth.

I spoke in June about the necessity for a serious conversation about government spending, given the extortionate waste seen under the last Tory government. The Treasury needs to recognise that the money they deal with is our money, and hence it is imperative that is handled responsibly.

It is thus a shame that the UK’s high tax, low growth economy will continue for at least another 5 years, and now we have a reckless borrowing spree to add to our fiscal woes.

Elon Musk’s idea for a department of government efficiency in the US shows promise, and something similar is badly needed in the UK, to break the infinite cycle of Treasury mismanagement.

Read my full summary of the budget for politics UK here.

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