The Budget: turns out Labour likes tax and debt
Chancellor Rachel Reeves MP has delivered the Labour government’s first Budget. The Budget’s tax and spend provisions will now be debated for four sitting days, before being bundled into a Finance Bill, which will follow an abridged course through Parliament. The Finance Bill must be passed within seven months i.e. ahead the 2025/26 tax year. With a 166-seat working majority, Chancellor Reeves’ Budget will very likely pass in full.
Our view:
Labour avoided a market meltdown. The Chancellor’s media advisors successfully trailed most major Budget announcements i.e., higher debt spending, higher business taxes and higher public spending, allowing markets to largely price them.
Labour’s higher tax rates and reduced business incentives will predominantly hurt Conservative voters, while their spending increases will likely benefit Labour voters, albeit with a lag.
Labour will struggle to maintain support of the business community, which they have largely ignored since winning power. Most business groups and leading entrepreneurs have begun to think of “non-” or “semi-losses” as policy victories, outlining the scale of mistrust that has developed since the July election.
The Conservatives will have a new leader in place by the end of this weekend. Labour will face much more scrutiny and resistance to their policies once they do.
Most of the major policy decisions will come online in Q2 2025, hurting present and future investment, hiring, and growth. Many of the large, offsetting spending and investment announcements will need parliamentary votes, Whitehall sign off, and local support, meaning they will take significantly longer to support growth.
Our wider view:
Labour’s fiscal approach prioritises state-spending, rather than business growth. Although running on a pro-business, pro-growth election platform, Labour’s early decisions point to a more state-led, dirigiste approach to growth, spending, and employment law, where the government picks winning and losing sectors for spending and support. We have long predicted this, in contrast to others who believed that Labour’s electoral "LinkedIn charm offensive” was sincere. The scale of negative sentiment on the main business social media platform, LinkedIn, is surprising, even as the more political- and media-focused Twitter, focuses on unpacking the Budget’s more granular policy document with a starkly more political- than business-centred approach.
Turns out Labour likes tax and debt. Labour’s public sector spending next year will be one of the largest in the UK’s postwar history, and will be nearly half funded by debt. To do this, Chancellor Reeves rewrote the UK’s fiscal rules, which is not atypical, but the scale of potential borrowing she has allowed herself is, and will likely lead to higher inflation, interest rates, and gilt yields. This will likely lead to further cannibalisation of government spending, as the government spends more on debt interest payments than on public priorities. Markets appear relatively sanguine about this large increase in debt spending, though, indicating muted acceptance and opportunism ahead of the heavily-trailed Budget.
Labour continues to think of their tenure as a decade long project i.e. a two-term government. Chancellor Reeves spoke at length about the poor economic inheritance she received from the Conservatives while also softening the ground for further increases to tax, spending, and debt. Although Reeves noted that it will take some time for the electorate to feel the benefits of more government spending, she left the door open to further increases in taxes and reductions of incentives. Her discussion of spending and investment decisions was framed as a five- to ten-year project, indicating Labour thinks that Reform UK will continue to eat into the Conservatives’ vote share on their right flank and the Liberal Democrats will do the same on their more centrist flank. With the next Conservative leader coming from the right of the party, they have reason to be confident of this view.