Much of this budget has not come as a surprise – £35bn of tax rises had been trailed in the papers this morning. In the actual event, £40bn has been raised.
Despite revealing little about their plans in the election, the Government has been fairly clear about their direction of travel ahead of this budget. Taxes were going to increase. The only uncertain issue was which taxes would rise.
For Rachel Reeves it was a difficult situation. I know how little room there is. Poor growth rates have condemned this country to higher taxation to pay for our public services.
The situation Reeves inherited was structurally difficult. In broad terms, public expenditure has expanded considerably, almost entirely as a consequence dealing with the adverse effects of Covid-19. Meanwhile, growth rates had more or less stagnated. For this reason, tax rates were going to rise.
Conservatives, like myself, should be honest. The highest tax take since the 1940s occurred under the Conservative government in 2019 under Boris Johnson. Having won the leadership contest in 2022, the subsequent attempt by Liz Truss and by me to reverse that trajectory was too dramatic and abrupt a shift. I can see that clearly now.
The market reaction to our attempt to sharply reduce taxes, without making clear spending reductions, was dramatic and immediate. Sterling fell to a record low a couple of days after the statement on 23 September, though it had recovered by mid-October, even before my dismissal.
More specifically, it was the gilt market reaction, where yields on the two and 10-year bonds spiked to then unprecedented highs, that broke the back of the government.
I was sacked on my return from the IMF by the Prime Minister. She somehow thought this might save her premiership. She announced her resignation a mere six days later. It was a humiliating experience.
Tory political dramas aside, however, the problem of how to encourage growth has simply not gone away. It has been exacerbated by further increases in public spending, which looks like it cannot be reduced.
The principal measures in today’s budget include lifting the living wage by 6.7 per cent to £12.21. With inflation just over two per cent, this is a generous increase which the operators of small businesses will have to bear.
The increases in Capital Gains Tax were to be expected, although I thought that the increase would be to 28 per cent from 20 per cent, for the higher rate. The actual figure it was raised to was 24 per cent. The lower rate was raised from 10 per cent to 18 per cent.
Employers’ national insurance has been raised to 15 per cent from 13.8 per cent. This move is expected to raise £25bn during the parliament. As a former energy secretary, I was concerned that the Energy Profits Levy has been increased from 35 per cent to 38 per cent and extended an extra year. This measure was widely expected, however, and continues what the Conservatives started.
The OBR, whose strictures are now firmly embedded in the budget process, have implicitly demanded tax increases to plug the funding gap. Only the enhanced tax revenues from a strongly growing economy can close that gap on a sustainable basis.
Given the need to raise taxes, and the Government’s pledge not to raise taxes on “working people”, it was perhaps inevitable that increases in the tax burden would fall principally on businesses and capital. Employers’ National Insurance contributions, Capital Gains and Energy Profits Levy – these are all taxes on deployers of capital. “Working people”, to use the Government’s own phrase, have been protected. This is surely to preserve what is left of the Government’s cratering popularity.
It was notable that the predictions for UK economic growth in the years 2026 to 2028 inclusive have been marginally revised downwards from the prediction in March. Then GDP was predicted to grow two per cent in 2026, as against 1.8 per cent in today’s forecast. Similarly, growth of 1.8 per cent and 1.7 per cent, in 2027 and 2028 respectively, has been revised down, in both cases, to 1.5 per cent..
This is potentially significant. In the medium term, the Government will survive or fall on this question of growth.
The biggest danger for the Government is that, without significant gains in growth, they may well seek to increase taxes even more in two or three years. Then “working people” may be asked to pay more in tax directly. Even higher taxes paid for by the general population in three years’ time could actually break the Government. Labour MPs will be acutely conscious of this.
Kwasi Kwarteng is a former Conservative MP. He served as Chancellor of Exchequer between September and October 2022 under Liz Truss