Reeves says budget tax rises may impact wages but investment will boost long term growth – UK politics live | Politics

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.

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.

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 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.

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.

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.

Rachel Reeves is now being interview on ITV’s Good Morning Britain.

She is being interviewed by Ed Balls, the former Labour shadow chancellor who is now a TV presenter. He asks her to confirm that workers will end up losing out because of the employers’ national insurance contributions (NICs) increase.

Reeves says the NICs increase will have an impact. But she says living standards are expected to rise during this parliament.

Balls pays a clip from the budget speech, where Reeves explained why she was freezing fuel duty.

Q: If raising fuel duty was the wrong choice for working people during a cost of living crisis, why was cutting the winter fuel allowance the right choice?

Reeves says, if she had not frozen fuel duty, petrol costs would have gone up sharply.

On pensioners, she says the state pension is going up by £470.

And she says the investment in the NHS will help everyone who uses the NHS.

Kate Garraway, Balls’ co-presenter, asks why the elderly should take a hit.

Reeves says the government is trying to get more people to claim pension credit, which will mean they can continue to get the winter fuel payment, as well as potentially thousands of pounds in pension credit. She says applications for pension credit are up 151%.

Q: You are gambling on growth. But some forecasts say it won’t do very well. Will people feel better off at the end of this parliament.

Reeves says the OBR says people will be better off at the end of this parliament.

Balls chips in again. He says the Institute for Fiscal Studies is predicting the second worst rise in living standards for any parliament since the war. That feels like a miserable rise in living standards.

Reeves says the government is just getting started. There is more to do, she says. But the OBR says real disposable income will increase, she says.

And that’s the end of the ITV interview, and all the early morning broadcast interviews Reeves is doing.

Rachel Reeves is now being interviewed on Radio 5 Live.

Asked about a business leader saying he now has to raise an extra £500,000 to pay the national insurance increase, Reeves says she recognises the challenges businesses face. But she had to stabilise the national finances, she says.

She is also asked to respond to complaints from a farmer about the budget, and farms worth more than £1m losing their exemption from inheritance tax.

Reeves says 73% of farms will not be affected at all.

Some landowners will have to pay more inheritance tax. But they will still pay less inheritance tax (20%) than many families pay.

Q: Are you embarrassed when I remind you you said at the election that every Labour policy was fully costed?

Reeves says:

When I became chancellor on 5 July, I had no idea about all the unfunded commitments that the previous government had made.

Robinson says, if she had listened to the Today programme, she would have heard them repeatedly heard reports about claims that the Tories’ spending plans did not add up. [The IFS was issuing press releases about this almost daily during the election campaign.]

Reeves says government borrowing is running much higher than forecast.

And that’s the end of that interview.

Rachel Reeves is being interviewed on the Today programme by Nick Robinson.

Q: How disappointed were you by the OBR saying the budget would not boost growth?

Reeves says she has to set a budget in circumstances at the time. She says she wanted to be “open and transparent” about the problems she faced.

She says the OBR has, for the first time, looked at the growth impact of the budget beyond the next five years. It says the plans, especially on infrastructure, will boost growth by 1.5% over the longer term.

As Julia Kollewe reports on the business live blog, the IMF has praised the budget. An IMF spokesperson said:

We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue.

Good morning. The day after budget day is normally when the most thorough and considered budget analysis starts to emerge, and rarely has there been more to chew over than there was in Rachel Reeves’s first budget as chancellor – a mammoth, £40bn-tax-raising fiscal reset with huge consequences for Britain for the rest of the decade. Reeves and her Tory shadow, Jeremy Hunt, are doing full media rounds this morning, and the leading budget thinktanks are publishing full studies of what was announced yesterday.

In an interview with BBC Breakfast, Reeves accepted that people would get lower pay rises as a result of her decision to increase employers’ national insurance. She said:

I said that [the national insurance increase] will have consequences.

It will mean that businesses will have to absorb some of this through profits and it is likely to mean that wage increases might be slightly less than they otherwise would have been.

But, overall, the Office of Budget Responsibility forecast that household incomes will increase during this parliament.

That is a world away from the last parliament, which was the worst Parliament ever for living standards.

Here is the agenda for the day.

9am: The Resolution Foundation publishes its full budget analysis.

10.30am: The Institute for Fiscal Studies holds a press conference to present its budget analysis.

11.30am: Downing Street holds a lobby briefing.

After 11.30am: MPs resume their budget debate, with Pat McFadden, the Cabinet Office minister, opening for the government.

5pm: Voting closes in the Conservative leadership contest. The results will be announced on Saturday morning.

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