Reeves has chosen decline

Labour have stuck to the line that they had “no choice” but to make “tough decisions”, but Rachel Reeves had an opportunity to put forward a Budget to kickstart economic growth, and she chose to do the opposite, says James Vitali

“Politics is always a choice”, the Prime Minister said on Monday during a pre-Budget speech. “So we won’t hide from our decisions on Wednesday or for that matter, any day”. 

Starmer and Reeves have repeatedly told the public over the last four months that their options have been limited. That they have had “no choice” but to cut winter fuel payments for pensioners; no alternative but to give no-strings-attached pay settlements to train drivers. They have kept diligently to the line that the last administration is responsible for the choices of the present one.

But with their first Budget in 14 years now delivered, Labour can no longer hide behind that defence. Budgets are exercises in choice – between different priorities, different interest groups, and different values. The government has stated that its highest priority – its solution to escalating fiscal pressures and stagnant living standards – is to kickstart economic growth. But on numerous occasions yesterday, the Chancellor opted for a course of action diametrically opposed to this objective. The OBR has confirmed this, predicting that the UK will now grow more slowly than it would have done before the Budget in 2026, 2027 and 2028.

To govern is to choose

In putting up employers National Insurance Contributions [NICs] and Capital Gains Tax, Reeves has decided to further shift resources away from the wealth-creating parts of the economy towards wealth-consuming ones – marking a complete reversal in the policy adopted by the Coalition Government and endorsed by Policy Exchange. An extra £40bn is to be taken out of the pockets of those earning and risking their capital in the private sector to fund pay settlements for those in the public sector – all without any binding requirement for productivity improvements. 

However one defines a “working person”, the Chancellor has opted to increase the burden of taxation on employers and employees, rather than holding down day-to-day government expenditure. The Office for Budget Responsibility (OBR) has noted in the past that increases in employer National Insurance Contributions will be translated swiftly into lower wages. By putting up NICs, the Chancellor has increased perhaps the only tax that will directly hit working people.

The government says it is committed to supporting higher levels of investment to help drive up per-head GDP. But by increasing taxes on capital, the Chancellor will necessarily diminish the incentives for private investment. Everyone knows we need to boost investment in our roads, schools and hospitals. But to fund this not through expenditure savings but by higher taxation and borrowing will hurt private sector investment, in which we so conspicuously lag competitor economies. The OBR believes that business investment will fall over the forecast period in consequence of the Chancellor’s decisions.

Not only this, but a £142.3bn increase in borrowing over the forecast period will come at a premium for households and the economy more widely, in the form of higher gilt yields, higher mortgage rates, and pricier borrowing for business. The OBR estimates that inflation will be 0.4 per cent higher in 2026 than they forecasted back in March. 

Labour has also pledged to cut red tape and bureaucracy to support businesses and drive enterprise in the UK economy. But in practice, the policies that the government has announced thus far, particularly those pertaining to labour markets and “day one” rights for employees, will lead to an increase in the regulatory burden on wealth creators to the tune of £5bn by its own estimates, without improving real wage prospects for workers. 

The government has not been forced into any of these moves on the economy. All of them were choices. But they don’t represent the “tough decisions” in the long-term interest of the country that Starmer has suggested his government is so intent on making. In fact, this Budget was the very definition of short-termism. Growth is now forecast to be slightly higher this year and next, after which the UK economy will grow more slowly than previously predicted.

You cannot simply oppose or critique when you are at the helm, but must instead take ownership of your decisions, and set out a positive plan for improving the prosperity of the British people

The truly difficult decisions that we need to make as a country concern how to hold down historically high levels of government expenditure. How to tilt our economy back towards wealth creation, rather than wealth extraction. How to shift people off welfare into purposeful work, and so to free up funding for public investment. About how to make the public sector more productive. 

It may well be legitimate to charge that the previous government largely ducked these decisions. But as of today, it is not clear that Labour is any more prepared to do what is required to revitalise our economy.

Now back in government, Labour is rediscovering that with power comes responsibility. That you cannot simply oppose or critique when you are at the helm, but must instead take ownership of your decisions, and set out a positive plan for improving the prosperity of the British people. On the evidence of this Budget, Labour’s plan for the economy may well do precisely the opposite, speeding our country further down the path of high taxes, low productivity, and stagnant pay growth.

Dr James Vitali is Head of Political Economy at Policy Exchange