Chancellor John Healey delivered his first Budget this week. His Budget contained 98 specific tax and spending measures, higher than in any Budget in recent history. Healey’s approach was predicated on ‘the state knows best’ mentality, but when it came to tackling big economic issues like our modest growth, he kicked the can down the road. CPS fellow Gerard Lyons gave his reaction to the Budget for CapX, it was long on intervention and short on economic strategy. It’s my piece of the week. Find out more below.
Damian Pudner looked at the Budget and saw nothing but a Chancellor taxing the banks and workers even more to pay for a booming benefits bill, instead of making the difficult decision with Labour’s majority. Labour removed tariffs on a small percentage of goods to help lower costs but Ted Grainger urges the Government to remove most of them. They should read their Adam Smith.
Andrew Tettenborn says that proposals to ban employers from asking candidates what they earn will only make recruitment more difficult and inefficient. Meanwhile, Matthew Lesh has a look at some new research which revealed UK data regulation is costing British tech businesses an estimated £5.3 billion a year.
Two-thirds (69%) of the 113 data-intensive technology businesses surveyed reported that compliance costs have risen over the past 5-10 years, while none say they have fallen, despite government attempts to reduce the burden in recent years
Elsewhere, Ryan Bourne took issue with Ed Conway’s view that since Thatcher, government has tried to make stuff as cheap as possible. Ryan argues successive governments have sacrificed affordability to other ambitions. Joseph Dinnage writes about why we need to fix our illogical tax system which is punishing doctors for working more. Madsen Pirie lays out how Margaret Thatcher made Britain a place to do business.
And in Nimby Watch, James Ball looks at Andy Burnham’s claim that devolution will speed up growth, when all the evidence suggests it empowers the Nimbys. Mani Basharzad looks at the European postwar welfare state and says it was built for a different time and different demographics.
On The Capitalist this week, Liam Halligan, Director of the Centre for Policy Studies, is joined by Daniel Herring, the Centre for Policy Studies’ Head of Economic and Fiscal Policy. They go through what was announced and what it means for taxes, growth and the public finances.
Oscar Gill-Lewis
Deputy Editor, CapX
Healey’s state-knows-best Budget won’t deliver growth
Gerard Lyons
The right language aimed at the wrong level. This was a Budget focused on micro-management. The Chancellor used the right language about the need to help workers and business, but it was predicated on ‘the state knows best’, with significant interference through targeted spending and tax hikes. The Red Book contained no fewer than 98 specific tax and spending measures. This is higher than in any Budget in recent history.
In contrast, the need to address some of the big macro-economic issues, such as continued modest growth and fragile public finances was postponed. In the summer the OBR said that fiscal pressures are likely to build over the long-term and it was a message it repeated today. Ahead of the Budget the market was unconvinced about future plans to reduce the ratio of debt to GDP and that is likely to remain the case.
Micro-management may allow the Government to claim it is taking action, but it is no substitute for tackling the macroeconomic challenges of weak growth, rising spending pressures and fragile public finances
Let’s consider the fiscal sums.
The Budget’s specific measures will provide a fiscal boost this year and next. They provide a fiscal boost of £7.6 billion in 2026/27 and £2.5 billion in 2027/28. In subsequent years, the Budget’s measures represent a fiscal tightening, of £0.7bn in 2028/29, £5.2bn in 2029/30, £6.1bn in 2030/31 and £7.4bn in 2031/32. As a result, the OBR notes that the tax take, in terms of the ratio of tax to GDP, ‘is expected to surpass its historic high of 37.2% in 2027/28’ and rise in every year of the forecast.
Public spending is expected to rise slightly to 45.7% of GDP in 2027/28 before falling to 44.7% by 2031/32. But this is predicated on curbing departmental spending, which seems unlikely. In turn, public sector net debt is expected to be 95.5% this fiscal year, and peak in two years in 2028/29 at 97.3%. But, even with an optimistic view of spending it still finishes the forecast period in 2031/32 at a high 95.6%. These fiscal numbers are vulnerable to any setbacks.
What about growth?
The Chancellor was right to highlight how the economy had been thrown off course by the war in Iran. Despite that, the economy has proved resilient in recent months. Even so the OBR’s forecasts point to modest growth. This is not a surprise, but it highlights the challenge. For a meaningful inroad to be made into the UK’s debt problem, the best solution is strong, sustained economic growth.
As the OBR notes, the near-term outlook is uncertain, being contingent upon the Iran war and its impact on energy prices, which will feed higher inflation and squeeze spending power. Real household disposable income is expected to fall a sizeable 0.8% this year, followed by only a 0.1% rise in 2027 and a 0.7% increase in 2028.
A year ago, the OBR forecast GDP growth of 1.4% for this year, which was already a reduction from the 1.9% it had forecast in spring 2025. By this spring, it cut that forecast further, to 1.1%. And while it raised it to 1.2% today, it might have been higher given the economy’s recent resilience.
Next year, though, the energy shock is expected to hit growth hard, with growth forecast at only 1%. That is low. Beyond that, the OBR sees growth averaging around 1.7% over the next four years. As the Chancellor noted in his speech, low investment has been a perennial issue, and while he announced measures to boost public investment, it is sluggish private investment that is the problem.
The most significant underlying policy shift appears to have been on energy policy, with a focus on targeted measures to reduce energy bills. A further review was promised, but in all likelihood this may move the future cost to keep bills low onto general taxation.
How will the City react?
The Chancellor faced two competing forces ahead of the Budget and his approach appears to have kept both on side, for now. His party was supportive of more state intervention and spending. Meanwhile the financial markets were looking for a Budget that did not provide any shocks, was growth friendly, met the fiscal rules and left a sufficient buffer to cope with future uncertainties.
That buffer, which had been £23.8bn for the main fiscal rule, is now set at £15bn, which was seen as acceptable to the markets ahead of the Budget. The other aspect for the City is that the increase in the banks’ surcharge tax was less than expected, from 3% to 6% and will be temporary. Also, as expected, the tax on the cash ISA will be left untouched.
All of this continues to take its toll on borrowing. The exact gilt issuance for coming years has yet to be announced, but it is likely to be sizeable, with the Gross Financial Requirement set to rise. This is the total the government needs to raise to cover new borrowing and the repayment of maturing debt. It is set to rise from £274.8bn this fiscal year, to £312.6bn in 2027/28 and £300.4bn in 2028/29, before stabilising around £250bn, predicated on the improved debt figures, which may not materialise. The Debt Management Office also announced a £4.4bn increase in gilt issuance for this fiscal year, compared to its spring forecast, with gilt sales of £250.6bn. High borrowing and high debt servicing look set to remain a fixture for some time.
The Budget will not materially impact the forthcoming decision of the Bank of England on interest rates. If anything, the OBR’s confirmation of a further rise in inflation and the fiscal boost provided by this Budget will add to the inevitability of a hike in the Bank Rate from 3.75% to 4% on November 5. The market expects Bank Rate to rise further over the next year, towards 4.5%, adding to pressure on the housing and construction sectors, as well as keeping yields elevated, adding to borrowing costs.
The Chancellor has bought some breathing space but the economy may still be gasping for breath in coming years if growth is modest, and debt high. He has done little to address the underlying weaknesses of the economy. The Budget was long on intervention and short on economic strategy. A ten-year plan is promised. Micro-management may allow the Government to claim it is taking action, but it is no substitute for tackling the macroeconomic challenges of weak growth, rising spending pressures and fragile public finances. The danger is that the difficult decisions have merely been postponed.
And if you want more…
– Bureaucrats are interfering too much in businesses (Andrew Tettenborn)
– Healey’s do-harm Budget (Peter Young)
– Politicians should have less say in the economy, not more (Tim Worstall)
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