How will Rachel Reeves' Budget reset and remake Britain?
ITV News' Political Editor Robert Peston explains how the upcoming Budget compares to previous announcements
It’s funny how things turn out.
For many of its proponents, leaving the European Union was supposed to usher in an era of lower taxes, a smaller public sector, and a larger more vibrant community of small businesses.
Almost none of that was delivered by post-2016 Tory governments.
And almost exactly the opposite of the right-wing Brexiters’ utopia is coming from the newish Labour government, with tomorrow’s Budget - which will reconstruct and reset the British state and British economy in a form that would be an anathema to more-or-less all Brexiters on the right.
There is zero chance that the Chancellor Rachel Reeves will frame her historic Budget as the first ambitious attempt to remake Britain after Brexit.
But that is what it will be, because it will endeavour to achieve three very big things, by exploiting the money-raising and allocative power of the state rather than via the distributive mechanisms of the market and private sector.
These are the three main Budget themes:
To increase public sector investment each year by more than £20 billion, as a carrot for significantly greater private sector investment.
This will be achieved via a reform of the debt fiscal rule. The purpose will be to stimulate productivity, growth and rising living standards.
To increase borrowing for investment to the tune of those tens of billion pounds, but simultaneously to finance day-to-day spending wholly through tax revenues by 2029.
This is how Reeves hopes to reassure investors and avoid fiscal shocks.
It in turn necessitates an increase in taxes to the tune of up to £40 billion a year, which could be a modern record.
To reform public services so that over time they become both more efficient and more affordable, especially health and welfare, against the expensive backdrop of an ageing population.
In this way, Reeves and the prime minister hope to achieve their twin ambitions of economic and monetary stability on the one hand and economic growth on the other.
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What’s striking is that their means is via higher taxes, borrowing and public spending, when all are at or near post-war records.
And you’ll recall that the two of them spent most of the recent general election campaign saying they really didn’t want to increase taxes, because they’d risen so much in preceding years.
But Reeves will argue their hand has been forced by an inheritance from the Tories of crumbling public services and unfunded spending over-runs.
It’s an excuse she and Starmer can use only once, and only now.
Which is why the Budget will announce a lot of potentially unpopular and painful measures, in the hope and expectation that they won’t have to come back and ask voters for a lot more in additional taxes between now and the next election.
That said, some of what they will unveil will be described by economists and tax experts as sub-optimal.
For example, their plan to claw back Jeremy Hunt’s £20 billion in national insurance (NI) cuts for employees via a £20 billion rise in NI for employers is a fiscal prompt for the words “daft” and “brush”.
It would have been far cleaner and would have posed less of a risk to employment to simply reverse the employee NI cut. But Starmer’s manifesto pledge not to tamper with NI rates precluded that.
Similarly there was a strong case for reforming capital gains tax, but apparently HMRC lacked the resource to properly work through the consequences of root-and-branch change, so instead Reeves has opted for the path of least resistance, via an increase in the basic rate from 20% to around 24%.
But the potential tax change that interests me most - because it’s all about whether Starmer’s government puts wooing the right-wing media above or below his supposed fundamental convictions - is whether Reeves imposes the fuel duty escalator for the first time since 2010.
You would think that this government would raise fuel duty by the rate of inflation or more, given that it badly needs the £1.5 billion or so it would yield, and based on its climate change principles.
But there is a powerful motorists’ lobby that - via its friends in the tabloid press - has managed to put the escalator on ice for well over a decade.
If Reeves chooses not to increase fuel duty, she may claim that’s because she’s anxious about hurting small businesses.
What she should say is that she is anxious about hurting small businesses more than would otherwise be the case - because it is the small business sector that will struggle most with the significant cost increments from her NI change, a big rise in the national minimum or living wage and Angela Rayner’s reforms to employees’ contractual rights.
At best the small business sector will stagnate. At worst, many small businesses - that have been barely profitable for years - will collapse.
Big businesses, by contrast, are likely to welcome the Budget. They find it easier to absorb the assorted increases to their running costs, they want a predictable stable path for tax, spend and borrowing, and the public-sector investment plans will yield significant profitable opportunities for them.
It is in keeping with long political history for the biggest companies to prosper under a Labour government. The idea of Labour as a proponent of the corporate state is as old as the mixed economy.
All of which will be agonisingly painful for the right-wing Brexiters who believed leaving the EU would see the UK remade as Singapore-on-Thames.
If anything, it has ushered in a UK that is diverging at pace from the structure of the US or Asian economies and converging much more with the corporatism of continental Europe.
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