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No one couldGDPOBRNHSOBR AIM EV NHSGDP GDP OBR NHS Your browser does not support the element. argue the numbers in were too small. On October 30th Rachel Reeves, the chancellor, laid out over £40bn ($52bn) in tax rises, more than any budget has raised in at least half a century. Borrowing went up, too. Ms Reeves loosened the rules constraining borrowing to invest, and then ran close to the limit of her newly generous yardstick.The result was a package of fiscal easing worth nearly 1% of , an amount without much recent precedent outside recessions and pandemics (see charts). The Office for Budget Responsibility (), a fiscal watchdog, reckons that stimulus could push inflation up by 0.4 percentage points at peak and only durably boost growth after almost a decade; gilts sold off sharply as financial markets absorbed the news.This is a big contrast with the steady-as-she-goes approach Ms Reeves took before the election. Labour’s manifesto contained only a few tax tweaks and spending bumps. Instead of raising taxes, the campaign patter ran, Labour would pull the “growth lever”. But although this was a big budget, it was not an ambitious one. Dialling up taxes and borrowing to inject money into the National Health Service () is familiar for the Labour Party, even if the cash was sorely needed. Unfortunately, Ms Reeves ducked the chance to make Britain’s tax code more growth-friendly, and in places even worsened it. She also mostly ignored the for Labour, such as how to ensure that an island full of ever-older, ever-sicker people does not force up taxes indefinitely.The centrepiece of the budget was an increase to employers’ national insurance that the expects to raise £26bn (falling to £16bn after it flows through to lower wages). Ms Reeves, insists, unconvincingly, that the move does not run afoul of Labour’s pre-election promises not to raise national insurance or taxes on “working people”. In practice, employers will gradually pass on the bulk of the tax rise to workers in the form of slower pay rises. Sermons from leading Tories on the economics of tax incidence are now all but inevitable.Setting aside the scholastic wrangling over broken promises, Ms Reeves was at least right to achieve the bulk of her tax rises through a single, broad-based tax. But it would have been cleaner to have reversed cuts to national insurance made by her predecessor, Jeremy Hunt. Using employers’ national insurance raises the tax penalty on employment versus self-employment, a long-standing drag on productivity., an area where Labour had made a lot of noise, will raise another few billion. Some changes ended up being gentler than expected—raising capital-gains tax from 20% to 24%, shaving exemptions on inheritance tax and making the taxation of private-equity performance fees a little less generous. But others were tougher, most notably the treatment of non-domiciled taxpayers. Months of grisly pre-budget speculation about plans to soak the rich may already have hurt Britain’s reputation as a haven for footloose international capital.Most revealing were the steps that Labour did not take. On tax after tax, Ms Reeves opted for easy fudges . On capital-gains tax, she could have raised the same amount less painfully by shifting the tax base to affect gains only above a risk-free rate of return (but doing so at a higher rate) and by limiting exemptions. She went a little further on inheritance tax but, again, not far enough. One especially loud sigh of relief came in the market, a tax-advantaged index of small-cap stocks which soared by over 4% after Ms Reeves indicated that its inheritance-tax exemptions would be watered down but not entirely eliminated.Fresh from a big election win, this would have been an ideal chance for Ms Reeves to make big-ticket improvements. One natural place to look would have been stamp duty, a property-transaction tax that is probably the single biggest growth-blocker in Britain’s tax system. Instead of cutting it, she raised it for second homes. Nor did Ms Reeves touch taxes on gambling, which could have raised a few hundred million while deterring some unwise financial decisions. Now would have been a perfect time to revisit road taxes. Electric vehicles are spreading quickly and are not covered by fuel duties. Far easier to start taxing them now, before a vocal lobby of owners is in place to complain. But Ms Reeves did nothing there and, worse yet, continued her Tory predecessors’ cowardly habit of freezing fuel duty.What of her spending choices? The biggest single beneficiary of all that extra tax revenue will be health care, which is set for a 3.4% real-terms rise in its day-to-day budget over this fiscal year and the next. (Education will also do well, getting a real-terms increase of 3.5%.) But the increase is at once too small and too large. It is unlikely to properly put the back on an even keel: a 3-4% real-terms increase is roughly in line with the historical norm (though above what was on offer in the years before the pandemic). But with growth well below 2%, having a health-care system that grows at twice the rate of the broader economy is also unsustainable. The critical question, then, is whether the government can work out . Beyond a few platitudes about finding efficiencies and harnessing technology, Ms Reeves had little to say on that.The budget’s plans for borrowing are almost as hefty as the tax hikes: around £30bn more annually, enabled by a loosening of Britain’s fiscal rules, something Ms Reeves had committed before the election not to do. Instead of targeting a measure of government debt, her new rule targets “public-sector net financial liabilities”, which offset government debt against some liquid assets like the student-loan book. She has made other fiscal-rule changes, too, which are broadly sensible. Shifting over time to target a three-year forecast rather than a five-year one reduces the scope for governments to pencil in dodgy long-term plans in the knowledge that they may not be in office when they bite; by ensuring that day-to-day spending is met without borrowing, Ms Reeves has ruled out the prospect of Liz-Truss-style unfunded tax cuts.Overall, there is a solid case for more borrowing—Britain’s record on public investment has been feeble for decades. But, as the market’s reaction to the budget has shown, borrowed money is not free. Interest payments on government debt cost Britain 4.5% of in 2023, more than double the defence budget. A front-loaded investment spree risks overheating the economy unless the spending is directed at the biggest supply-side constraints on Britain’s growth, including transport and power infrastructure. The sees a short-term inflation boost from the budget. A big round of public investment also cannot substitute for private investment—indeed, it risks crowding it out.So Labour needs to supply investment that is well-directed, efficiently spent and does not overheat the economy in the short term. The government is setting up a new body called the Office for Value for Money to oversee the spree; a ten-year infrastructure strategy is coming in the spring. But the British state’s recent spending record on that count is hardly impressive. A splurge must also be accompanied by changes to the planning rules and the judicial-review system, both of which get in the way of building.Across taxes, borrowing and spending, the government is betting big: that tens of billions in extra spending will make a difference, that Britain’s workers and firms can bear ever-higher taxes, that markets will support a big fiscal expansion. Those bets will come good only alongside equally ambitious reforms to the tax system, to public-service provision, to the planning system and more. On that, this heavyweight budget was alarmingly light.
