Since the election last year, the UK government has said economic growth is its top priority, as a way to improve living standards, cut NHS waiting lists and ease pressure on household finances. But with the Office for Budget Responsibility predicting growth this year to be a below-average 1.5%, it seems things haven’t gone entirely to plan.
So would Rachel Reeves’ second budget provide any glimmers of hope? Here’s how our panel of experts reacted.
Tax-raising budget that may encourage growth – but doesn’t guarantee it
Maha Rafi Atal, Adam Smith Senior Lecturer in Political Economy, University of Glasgow
This is a substantially tax-raising budget, but one that tries to obscure where the burden will fall. Rather than confronting the need to raise the basic rate of income tax, the government has opted for a prolonged freeze in thresholds. This is, in effect, a sizeable stealth tax: as wages rise with inflation, more middle-earners are pulled into higher-rate bands.
However, this approach is still more weighted towards raising revenue from higher earners than a broad-based rise that would spread the load across the income distribution. A sharp break between the basic and higher rates – an unusual feature of the UK income tax setup – remains. Changes to national insurance follow a similar stealth logic. The rate remains unchanged, yet its scope has widened, particularly through restrictions on pension salary-sacrifice.
Whether these kinds of changes break Labour’s manifesto commitments not to raise taxes on “working people” is increasingly a matter of semantics. Many working people’s take-home pay will be less than it would have been, even if the headline tax rates have not changed.
One positive consequence of raising the revenue this way, however, is that individuals and households – not just employers – will carry much of the cost. Some measures that would have directly targeted businesses, like a bank windfall tax, have been abandoned.
This makes the budget more supportive of growth than early reports anticipated, because taxes that fall primarily on employers take funding away from things like opening new facilities or creating jobs.
No windfall tax for the banks.
Phillip Roberts/Shutterstock
Yet the growth forecasts remain weak because there is still no plan to raise productivity. Government investment in skills and infrastructure is lacking, and tighter immigration controls (which the government is also imposing) limit labour supply and impose other transaction costs on businesses. Growth requires broader changes to these other aspects of economic policy and cannot be generated through tax reform alone.
£3 trillion government debt weighs heavily on Reeves’ budget choices
Steve Schifferes, Honorary Research Fellow, City St George’s, University of London
The chancellor has announced measures to raise £26 billion in her budget statement. Driving her decision is the need to cap the size of the government’s debt, which, at £2.9 trillion amounts to 95% of the total size of the UK economy.