IFS says Reeves’s long-term government spending figures almost as unrealistically low as Tories’ were
One of the great traditions of a British budget is that, whichever party is in power, and whoever is chancellor, the Institute for Fiscal Studies always comes out the next day and picks holes in it. It has been doing it again this morning.
The IFS is not universally critical, it is more positive about some budgets than others, and overall it is more complimentary about what Rachel Reeves announced than it was about the efforts from some of her predecessors. But it is still finding fault, and in his opening presentation at the IFS press conference this morning Paul Johnson, the IFS director, said that Reeves’s longterm spending plans were almost as unrealistically low as Jeremy Hunt’s. He explained:
Much the most striking aspect of the spending decisions is how incredibly front loaded the additional spending is. Day-to-day public service spending, after inflation and the additional cost to public sector employers of rising NI, is set to rise by 4.3% this year and 2.6% next year, but then by just 1.3% each year thereafter …
I am willing to bet a substantial sum that day-to-day public service spending will in fact increase more quickly than supposedly planned after next year. 1.3% a year overall would almost certainly mean real terms cuts for some departments. It would be odd to increase spending rapidly only to start cutting back again in subsequent years.
I’m afraid this looks like the same silly games playing as we got used to with the last lot. Pencil in implausibly low spending increases for the future in order to make the fiscal arithmetic balance. It sounds like it was hard enough to get agreement from departmental ministers to relatively generous settlements in the short term. When it comes to settling with departments for the period after 2025-26 keeping within that 1.3% envelope will be extremely challenging. To put it mildly ….
[Reeves] is meeting her borrowing target only by repeating the same silly manoeuvres as her predecessors used to make it look as if the books will balance. Let’s pretend we’ll increase fuel duties next time, but not do it this year. Let’s pretend that we’ll really rein in spending in a couple of years after splurging this year. That’s not going to happen. The spending plans will not survive contact with her cabinet colleagues.
I will post more from the briefing soon.
Key events
National insurance hike won’t raise as much as budget book implies, IFS says
And here are some more lines from Paul Johnson’s opening briefing at the IFS press conference this morning.
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Johnson, director of the IFS, said the government needed a “more coherent tax strategy” to promote growth. He explained:
As for the rest of the tax changes [after the national insurance rise], I will only say that the lack of any apparent strategy or appetite for reform is deeply disappointing. Unlike the coalition’s corporate tax “road map” the one published yesterday is more of a parking space – an ambition not to take a big journey in any direction. That the chancellor decided to increase stamp duty, if only on second properties, is most disappointing of all. It again reduces transactions, increases again the bias in favour of owner occupation, and against renting, and at least part of the consequence will be to reduce the supply of rental housing and so increase rents …
If this government really wants to focus on growth, then part of the plan needs to be a much more coherent tax strategy than we saw yesterday. Let’s hope for better next year.
Also disappointing is some of the presentation – even after the “conspiracy of silence” entered into during the election campaign. How the budget red book can include the sentence “it [the government] is not increasing the basic, higher or additional rates of income tax, National Insurance contributions or VAT” is beyond me. The continued pretence that these changes will not affect working people risks further undermining trust.
Johnson may have drafted this statement before Rachel Reeves’s interview round this morning, where she did concede the national insurance rise would affect workers. (See 8.02am.)
It is also worth noting that, net, this increase will not actually get the Treasury anything like the £25bn stated on the scorecard. As the OBR note, it will result in lower wages, reducing the amount raised from employer NI and reducing employee NI and income tax revenues. That takes the net revenue down to some £16 billion. On top of that there will be an effective £6bn of compensation for public sector employers.
[Reeves] chose to increase borrowing in order to increase investment spending – or at least to stop it falling as a fraction of national income. Given that the growth benefits of this take some time to arrive, this is a courageous move and a welcome focus on the long term. This was the right thing to do.
Unusually the NHS is not scooping the pool. It is getting about the average spending increase. Equally unusually local government is doing rather well, as is the justice department, reflecting the severe pressures each is facing.
The increases in spending look big relative to the previous government’s plans, but that is in large part because their plans were unrealistic. Despite the apparent scale of the increases, this is not going to feel like Christmas has come for the public realm. Ms Reeves may be overegging the £22 billion black hole, but she is not wrong to stress that she got a hospital pass on the public finances.
Rachel Reeves was faced with a genuinely difficult inheritance and the last government must take a lot of the responsibility. Its spending plans for this year and for the future lacked credibility. To cut £20 billion from employee national insurance last year in the face of known fiscal pressures was not responsible.
IFS says Reeves’s long-term government spending figures almost as unrealistically low as Tories’ were
One of the great traditions of a British budget is that, whichever party is in power, and whoever is chancellor, the Institute for Fiscal Studies always comes out the next day and picks holes in it. It has been doing it again this morning.
The IFS is not universally critical, it is more positive about some budgets than others, and overall it is more complimentary about what Rachel Reeves announced than it was about the efforts from some of her predecessors. But it is still finding fault, and in his opening presentation at the IFS press conference this morning Paul Johnson, the IFS director, said that Reeves’s longterm spending plans were almost as unrealistically low as Jeremy Hunt’s. He explained:
Much the most striking aspect of the spending decisions is how incredibly front loaded the additional spending is. Day-to-day public service spending, after inflation and the additional cost to public sector employers of rising NI, is set to rise by 4.3% this year and 2.6% next year, but then by just 1.3% each year thereafter …
I am willing to bet a substantial sum that day-to-day public service spending will in fact increase more quickly than supposedly planned after next year. 1.3% a year overall would almost certainly mean real terms cuts for some departments. It would be odd to increase spending rapidly only to start cutting back again in subsequent years.
I’m afraid this looks like the same silly games playing as we got used to with the last lot. Pencil in implausibly low spending increases for the future in order to make the fiscal arithmetic balance. It sounds like it was hard enough to get agreement from departmental ministers to relatively generous settlements in the short term. When it comes to settling with departments for the period after 2025-26 keeping within that 1.3% envelope will be extremely challenging. To put it mildly ….
[Reeves] is meeting her borrowing target only by repeating the same silly manoeuvres as her predecessors used to make it look as if the books will balance. Let’s pretend we’ll increase fuel duties next time, but not do it this year. Let’s pretend that we’ll really rein in spending in a couple of years after splurging this year. That’s not going to happen. The spending plans will not survive contact with her cabinet colleagues.
I will post more from the briefing soon.
Firms with workers on low wages will face highest proportional rise in labour costs from national insurance hike, says IFS
The Institute for Fiscal Studies’ briefing on the budget is underway.
One point it is making is that the rise in employers’ national insurance will, proportionally, have the biggest impact on firms employing people on low wages.
Reeves offers alternative explanation for how Tories left £22bn black hole, after OBR does not endorse original calculation
In July Rachel Reeves published a document claiming there was a £22bn black hole in the Tories’ spending plans, which Labour inherited, for 2024-25. The figure was widely quoted, although when the Financial Times tried to use a freedom of information request to get details of how the Treasury arrived at the £22bn figure, the Treasury would not release the information.
Yesterday the Office for Budget Responsibility published a report saying spending pressures were not fully disclosed by the last goverment. But it did not endorse the £22bn figure, and it implied that, if there was a black hole, it was more like £9.5bn.
This morning, in her interview on the Today programme, Reeves, rather ingeniously, suggested there was an alternative way of arguing that the Tories left a £22bn black hole. She did not withdraw or disown the Treasury calculation released in July. But when the presenter, Nick Robinson, put it to her that she should have known during the election campaign that the Tory spending plans were unrealistic, because that is what all the experts were saying (see 8.27am), she replied:
I think this is really important. Nobody knew about this in-year overspend.
It’s why, when we get the monthly borrowing numbers, in the six months of this year, they are already running £11bn pounds higher. Times that by two to take us to the full year, that’s £22bn pounds more than the OBR forecast in March because the previous government withheld that information.
Labour has got a history of redefining contested “black hole” figures. In May Labour claimed that there was a £71bn annual black hole in Tory spending plans. The figure was dismissed by most commentators as a wild exaggeration, not least because it assumed that the Tories would abolish national insurance in its entirety without replacing it with an alternative source of income (something that Jeremy Hunt had floated as a very long-term aspiration, but that was not widely seen as a realistic aim). Later, during the proper election campaign, Labour produced a more realistic assessment of the black hole in Tory plans, focusing on what the five-year figure would be, not the annual figure. Conveniently, this also came to £71bn.
The Institute for Fiscal Studies is about to hold a press conference to present its own, detailed budget analysis. You can watch it here.
Current parliament set to be ‘not much better’ than last one for household income, says Resolution Foundation
The Resolution Foundation thinktank has this morning published a 61-page analysis of the budget.
Like the IFS (see 8.50am), the Resolution Foundation says this parliament is set to be the second worst since the war for rising living standards. It explains:
Indeed, the outlook for living standards looks weaker than the OBR projected in March 2024, with real household disposable income (RHDI) per person set to increase slightly (up 1.5 per cent) between 2024 and 2025, compared to a projected increase of 1.7 per cent in the March 2024 forecast. Notably, the living standards outlook later in the forecast period has been revised down more significantly … In March, the OBR projected RHDI per person to grow by 1.3 per cent between 2027 and 2028 – but in its latest set of forecasts, the OBR projected RHDI per person to grow by just 0.4 per cent during this period (and then to grow by only 0.7 per cent between 2028 and 2029).
Some might view any income growth as a cause for celebration, since the last parliament remains the worst since at least the 1950s for living standards improvements. As figure 30 [see below] shows, RHDI per person rose by an average of just 0.3 per cent a year during the 2019-2024 parliament. But the forecast for this parliament is not much better: RHDI is set to rise by 0.5 per cent a year across this parliament, equating to a total income gain of £700 per person between the 2024 and 2029 elections (in 2024-25 prices). This projected income growth is a far cry from the living standards increases that were experienced during the last Labour government, during which even the worst term for living standards (the 2005-2010 parliament) recorded 0.8 per cent annual growth. When we look across the entire period of the last Labour government (between 1997-2010), RHDI rose by a relatively strong 1.9 per cent on an annualised basis – equating to an overall income boost of £5,400 per person – even though this period of government included the financial crisis.
That said, this historically tepid projected real income growth over the course of the parliament needs to be seen in the broader context. Given its inheritance, the government presumably felt that increasing taxes to better fund day-to-day public services was the priority, even if that put downward pressure on incomes directly or, in the case of the employer NI rise, indirectly through the second-order earnings and employment effects. In this respect, the government has clearly gambled on the hope that the public will accept limited income growth over the parliament in exchange for improvements to public services.
And here is the figure 30 chart.
In his interview on ITV’s Good Morning Britain, Jeremy Hunt also confirmed that he will leave the shadow cabinet at the end of this week, when a new leader takes over. He said:
I have told [Kemi Badenoch and Robert Jenrick, the two leadership candidates left in the contest] that I will step back.
I think it is the right thing to do when a party suffers a loss of the scale that we have, so I will step back from the shadow chancellor role for a few years whilst the party recovers – but I will be very active on the back benches.
Hunt says he was wrong to accuse OBR of preparing pro-Labour report into alleged £22bn black hole in accounts
Earlier this week Jeremy Hunt, the shadow chancellor, suggested that the Office for Budget Responsibility was about to publish a report biased in favour of Labour. Referring to the news that the OBR was going to release the outcome of its review into Rachel Reeves’s claim that the last government had an undisclosed £22bn black hole in its spending plans, Hunt said:
Straying into political territory and failing to follow due process like this demeans it and also is deeply problematic for perceptions of the impartiality of the civil service.
But when the report came out yesterday, although it said that the Treasury withheld information from the OBR about spending pressures in the accounts at the time of the spring budget, it did not endorse the Labour claim about Hunt leaving his successor a £22bn black hole.
Speaking on ITV’s Good Morning Britain today, Hunt said he was wrong to imply the OBR was going to be party political. He said:
I was worried about the process through which they compile their report, but I am happy to say that I was wrong.
I was worried if they would criticise the previous government, but there were no criticism of the previous government in their report.
Hunt says Reeves took ‘easy route’ to better services by raising taxes, claiming Tories would have focused instead on reform
The Conservatives claim the budget includes a series of broken promises by Labour – about not planning to raise taxes, about ruling out a national insurance increase, about the pre-election fiscal rules being non-negotiable – and in interviews this morning Jeremy Hunt, the shadow chancellor, restated these claims. The budget was “a bad day for trust in British politics”, he claimed. Labour say they haven’t broken promises, and that during the election the Tories were criticising them for things like not ruling out a rise in employers’ national insurance.
But Hunt also accused Rachel Reeves this morning of “taking the easy route” in her budget, instead of finding an alternative to higher taxes that could also lead to better public services.
Speaking on ITV’s Good Morning Britain, he said:
I would always welcome more money for the NHS and we all want it to get back on its feet.
But there are choices in how you decide to do that and [Reeves] took the easy route – which is to pick the pockets of businesses.
He said the Conservatives would have adopted a different approach. Speaking on Sky News, he said:
With an ageing population, with all the pressures of what [Russian president Vladimir] Putin is doing in Ukraine, how do you fund our public services without really damaging rises in taxation?
We would have made difficult decisions on welfare reform, on the public sector, and productivity.
If you cut the number of people claiming benefits to 2019 levels – in other words before the pandemic – that releases £34bn a year.
The government has chosen to do nothing on that and, as a result, the adult working-age benefit bill is going to be more than £100bn by this end of this period.
We would have taken that harder path, because we know that the result of higher taxes is lower growth, and that is bad for ordinary families.
In an interview with BBC Radio Scotland’s Good Morning Scotland, Rachel Reeves, the chancellor, insisted that the Scottish government was getting extra money to reimburse the public sector for the extra cost of the national insurance hike.
She was asked about a comment from Shona Robison, the Scottish finance secretary, who said the employers’ national insurance increase could cost the public sector an extra £500m in Scotland.
Reeves replied:
We’ve given £3.4bn in the settlement to Scotland, which takes into account all of those pressures and the challenge now for the SNP in Scotland is to use that money wisely to start reducing waiting times, because, you know, frankly, the performance of the NHS in Scotland under the SNP is worse than in any part of the United Kingdom, and that money now needs to be used to address the priorities of the Scottish people.
Talking to Scottish MPs yesterday in parliament, this settlement was very welcome, the biggest settlement in the history of devolution.
The Scottish government now need to deliver.