As she delivered her second Budget, Rachel Reeves did not come across as “the Iron Chancellor”, but like a wobbly headmistress. The three principles she promised her budget was to be as she commenced her speech — stability, investment, reform — are precisely the areas in which this Budget falls dramatically short of what the British economy needs. Alas, it reveals the troubling fact that we have a government that mistakes the expansion of state activity for economic dynamism, and conflates fiscal expansion with fiscal responsibility, all whilst breaking the Labour Party Manifesto promise not to raise taxes on working people.
The Chancellor boasts of meeting her fiscal rules with £21.7 billion of headroom. Yet this achievement rings hollow when one considers how she achieved it: £26 billion in tax rises, pushing the tax burden to its highest level since WW2. In The Wealth of Nations, Adam Smith warned that “there is no art which one government sooner learns of another than that of draining money from the pockets of the people”. Reeves is clearly a fast learner. The freezing of income tax thresholds until 2031 — the quintessential stealth tax these days — will drag millions more into higher brackets through mere inflation, potentially raising £7.6 billion in the process. This creates a fiscal drag that Smith would have recognised as the worst sort of arbitrary exaction.
This Government has claimed it has a three-pronged approach to the economy: pursuing growth through supply-side reforms, reducing borrowing, and fixing welfare. Though laudable, the execution reveals a fundamental misunderstanding of supply-side economics and how prosperity emerges. The OBR’s downgrade of medium-term productivity from 1.3 to 1.0 percentage points prompts the question: how would economic growth be achieved if government spending is not matched by growing productivity? Attempts to fix welfare ignore its spiralling cost, particularly with the reckless removal of the two-child benefit cap — a move that will cost £3.1 billion by 2029/30.
In keeping with her assault on enterprise from last year, the measures proposed in answer to this question are punitive, flighty, and philosophically confused. For instance, raising property income tax, dividend tax, and savings tax while also freezing the thresholds that guarantee whether workers pay taxes at all, goes against a core principle of taxation: it should not destroy the incentive to save and invest. One can only understand such measures as an appeal to her backbenchers through inflicting retribution against those whose capital generates employment and innovation because they happen to also be the wealthiest in the nation. Reeves justifies this by claiming that “income from assets should contribute fairly”. But this misconstrues the nature of capital income entirely.
More pernicious still is the new High Value Council Tax Surcharge, a nakedly populist measure dressed in the language of fairness. Properties worth over £5 million will face charges up to £7,500 annually in addition to existing council tax, capital gains tax, inheritance tax, and income tax on rental yields. This isn’t taxation; it’s confiscation through cumulative burden. When the state can impose four or five different taxes on the same asset, we have moved beyond taxation into the realm of state predation.
Yet perhaps the Budget’s most revealing moment comes in its treatment of pensions. The cap on salary sacrifice for pension contributions, limiting NIC relief to £2,000, represents the Treasury’s insatiable appetite for revenue trumping any concern for capital formation. Workers who save diligently for retirement will see their tax relief curtailed, even as the government maintains £70 billion in other pension tax reliefs. The principle seems clear: the state will support dependency but discourage self-provision.
The fundamental problem is threefold. First, the Chancellor conflates public investment with productive investment, thereby mistaking inputs for outputs. Second, she imagines that fiscal consolidation can coexist with ever-rising state spending, as though changes to definitions of debt can overcome the reality of Britain’s bloated public sector spending. Third, and most damningly, she displays what Hayek criticises about socialism in his book The Fatal Conceit: that is the misplaced belief that centralised planning can allocate resources more efficiently than dispersed market actors. Securonomics at its best.
As Jean-Baptiste Say observed, “The best scheme of finance is to spend as little as possible, and the best of all taxes is always the lightest.” Rachel Reeves has given us precisely the opposite: ambitious spending and burdensome taxes, all in service of a vision of state-led prosperity that economic history has repeatedly refuted.
The Government has made choices, certainly. But they are the cautious choices of an administration afraid of difficult spending restraint
A true supply-side Chancellor would have had the courage to argue for lower taxes on investment, savings, and enterprise which will be funded by genuine spending restraint. The growth strategy set out in the Budget falls apart when placed beside a tax strategy that discourages the precise behaviours that would accelerate growth. Capital accumulation, entrepreneurship, long-term investment: these are the motors of productivity growth. Yet the Budget sends a signal that each will face a higher cost.
The Government has made choices, certainly. But they are the cautious choices of an administration afraid of difficult spending restraint. Rather than arguing for a smaller state, the Budget simply raises taxes to maintain the state at its current size. Rather than trusting in free market mechanisms, it has chosen to expand the state’s reach into taxation of capital and wealth. And rather than allowing productive individuals to keep more of their earnings, it has opted for stealth taxes that obscure the true cost of government from public view.
Who knows — perhaps the Chancellor may prove successful by the narrow measures of fiscal accountancy. Borrowing may fall. Deficits may shrink. The OBR will nod its approval at the numbers. But somewhere in that calculation lies a risk that the Government has not adequately considered: that by constraining the growth of private capital formation, it may have ensured that these improvements in the public finances come at the cost of future prosperity. In the end, as Adam Smith understood, the wealth of nations depends upon the accumulation of productive capital and the freedom of individuals to direct their own labour and investment toward profitable ends. This Budget, whatever its merits on paper, does not trust either of those principles. And that should concern us all.
